5 ways to work with customers with bad business credit

In an ideal world, every business you trade with would pay their invoices on time and in full. However, the reality of running a small business often involves managing customers who have a low business credit score. While a single late payment might feel like a minor inconvenience, the cumulative effect on your cash flow can be severe. Late payment is not a minor issue. According to the Federation of Small Businesses, late payments cost UK small businesses an estimated £22,000 per year on average and contribute to around 50,000 business closures annually.  When your capital is tied up in a customer's debt, you lose the ability to invest in your own growth, pay your suppliers, or cover essential overheads. Understanding how to identify high risk customers and implementing strategies to mitigate that risk is essential for your financial resilience. This guide explores what constitutes a low credit score and provides practical steps to protect your bottom line.

What is a low business credit score?

Credit reference agencies (CRAs) like Experian use algorithms to assess how likely a business is to meet its financial obligations. They look at data points such as financial performance, payment history, and public records like County Court Judgments (CCJs). Experian business credit scores range from 0 to 100. In this system, 0 represents the highest possible risk of default, while 100 indicates the lowest risk. These scores are further categorised into alphabetical bands:

• Band A (91 to 100): Very low risk. These businesses typically receive the best trade terms.

• Band B (81 to 90): Low risk. These are generally reliable partners.

• Band C (51 to 80): Below average risk. This is a wide band where lenders and suppliers may start to apply more caution.

• Band D (25 to 50): Above average risk. A score in this range is typically considered low.

• Band E to G (0 to 24): High to maximum risk. These businesses may be in significant financial distress.

If a customer has a score below 50 or falls into a 'D' banding or lower, they are considered a higher risk. This doesn't mean you should never work with them, but it does mean you need to change how you manage that relationship to avoid potential financial strain.

Tips for working with low credit score customers

It’s unlikely that you will be able to avoid high risk customers entirely, especially if you operate in a competitive industry. Instead of turning away business, you can use these five tips to manage the risk effectively.

1. Request payment upfront

The most effective way to eliminate the risk of non payment is to remove the element of credit. Requesting payment upfront, or a significant deposit before work begins, ensures that your costs are covered. While this is straightforward, it can be a difficult conversation to have with a new or existing client. You might consider framing this as a standard policy for new accounts or specific project types. If the customer is unable to pay the full amount upfront, you could suggest a pro forma invoice where the goods are only dispatched once the funds have cleared.

2. Set realistic credit terms and limits

If upfront payment isn't an option, you must be disciplined about how much credit you extend. You should never offer the same terms to a Band D customer that you would to a Band A customer. A useful tool in this process is the recommended credit limit. When you run a company credit check through a platform like Capitalise, you can see a specific pound amount suggested by Experian. This represents the maximum amount of credit you should ideally extend to that business at any one time. If you have multiple outstanding invoices for a single customer, compare the total balance against their credit limit. If they have reached or exceeded that limit, you could consider pausing further work or deliveries until the balance is reduced, or requesting payment upfront. 

3. Strengthen your credit control processes

Effective credit control is your business's primary defence against bad debt. It is not just about chasing money once it is late; it is about setting clear expectations from the start. Here’s some tips for a strong credit control process:

• Clear payment terms: Ensure every invoice clearly states the due date, the total amount including VAT, and your bank details. Ambiguity is a common cause of payment delays. You can use our free invoice template to ensure you have the correct information included.

• Late payment interest: Reference the Late Payment of Commercial Debts (Interest) Act 1998 on your invoices. This UK legislation allows you to charge interest on late payments and claim a fixed sum for debt recovery costs.

• Pre-emptive reminders: Don't wait until an invoice is overdue to make contact. Send a friendly reminder seven days before the due date to ensure the invoice has been received and is scheduled for payment.

• Phone calls over emails: If an invoice becomes overdue, a phone call is often more effective than an automated email. It allows you to identify if there is a genuine dispute or a temporary cash flow issue that can be resolved with a short term payment plan.

4. Monitor credit profile changes in real time

A business's financial health is not static. A company that was a 'low risk' partner last year could be facing a winding up petition today. Monitoring the credit scores of your most significant customers allows you to be proactive. If you receive an alert that a customer's score has dropped significantly or that a CCJ has been registered against them, you should review your exposure immediately. This might involve reducing their credit limit, tightening your payment terms, or moving them to a 'cash on delivery' basis. With a Capitalise account, you’ll receive instant alerts when a company’s credit profile changes, so you’ll know right away when action needs to be taken. 

5. Know when to pursue debt recovery

There’s a fine line between maintaining a good customer relationship and protecting your own business. If an invoice is 30 days past its due date and your internal chasing has yielded no results, it could be time to consider formal debt recovery. In the UK, you can use a statutory demand as a formal way to ask for payment. If the debt remains unpaid after 21 days, it can lead to a winding up petition. Often, the mere threat of formal legal action or the involvement of a third party debt collection agency is enough to move your invoice to the top of the customer's payment pile.

Protecting your cash flow with Capitalise

Managing customers with low credit scores requires a balance of commercial awareness and robust data. Relying on gut feeling or past experiences can be risky in a volatile economic climate. Capitalise helps you take the guesswork out of credit management. Our platform gives you instant access to Experian business credit scores and financial data for any limited company in the UK. By monitoring your customers' credit profiles, you can spot red flags like CCJs or declining scores before they impact your bank balance.