Checking a customer before you give them credit

Every time you do the work before you are paid, you are lending your customer money. So check them the way a lender would: confirm the company and its directors on the Companies Office, run a credit check, treat trade references with care, and let what you find set the terms of the credit you give.

You are already acting like a bank

If you supply your time, your services or your goods before you are paid, in part or in full, you are extending credit. Your customer is treating you like a bank. And no bank is going to give anyone a $1,000, $10,000 or $1,000,000 loan without the right paperwork, some kind of security, and doing their due diligence, including a credit check. So if we are going to be treated like a bank, we need to think like one and act like one.

A lender does three things: due diligence, an agreement that can be enforced, and security. This page is about the first, and it is the least used tool a business has access to. When we are asked whether businesses underuse the PPSR, the answer is yes, and so is credit checking. It costs very little, and the cost is not what stops people.

Business owners make judgment calls all day long, and deciding who will pay by how they present is right to a large extent. How they carry themselves, how they talk about the job, whether they are a friend of a friend: all of that tells you something. It just is not right every time, and the number of people who end up unpaid and never saw it coming is baffling. A customer can be a good payer until they are not.

Start with the Companies Office

It is free and it is public. Look the customer up on the Companies Register and check four things.

• The exact legal name. Your agreement is with a legal entity, and it needs to be the right one. We have seen invoices on liquidators’ reports without a legal name on them.
• That it is a registered company at all, and that the directors are who they say they are.
• What else the directors have been involved in. Have they opened and closed a lot of companies? A previous liquidation is a little bit of a red flag. It does not rule anyone out, but it is worth knowing before you start.
• What is registered against the company on the PPSR. If others have already taken security over its assets, you want to know that too.

One of our clients had traded with a customer for nine years when it went into liquidation. The company named on the signed credit application did not exist. Nine years of good trading, and nobody had checked the name. We tell the whole story in early warning signs.

If you bought the business, check the customers you inherited

That same customer had never been onboarded by our client at all. The relationship existed before he bought the business. When a customer comes across as part of a business purchase, the original documents may have been signed with the previous owner or their legal entity, so those customers may need to be re-papered when ownership changes. It is the sort of tiny administrative detail that feels completely irrelevant when somebody has paid you perfectly for years, right up until the moment it isn’t. The payment habits you inherit matter as much as the paperwork, and we cover those in “they’re a good client”.

Then run a credit check

If you went to a bank for a loan, they would run a credit check on you. So when somebody opens an account with you, a credit check belongs in the process. You are essentially lending a stranger money. A credit report is not biased: it reflects what is happening for that business in the market, which is exactly what you cannot see from the job site.

You can check a company whenever you like. Checking a person, a director, a sole trader or a homeowner, needs their permission, which is what the privacy clause in your terms of trade and account application is for.

What comes back informs three decisions: whether you take the job, how much credit you give, and what terms or protection you put around it. It gives you better information before you take on the risk, and the decision stays yours.

What a credit check can’t always show you: tax owed to Inland Revenue

The debt that most often sits behind a company going under is the one you are least likely to see. One of our clients was owed $140,000 on a big project when the customer failed. A credit check on that customer might not have shown a poor score at all. What it would not have shown was that they owed nearly a million dollars to Inland Revenue.

That is starting to change, and it is worth knowing exactly how far. Inland Revenue says it may share information about overdue tax owed by companies with approved credit reporting agencies, which can then include it in their credit reports. According to Inland Revenue, it will only share it when:

• the debt is a company’s income tax, GST or PAYE deductions
• the debt is more than $150,000, or has been overdue for at least 12 months and is 30% or more of the company’s assessable income for the last 12 months
• the debt is not formally under dispute
• Inland Revenue has made reasonable efforts to collect it
• no application for relief or remission is being considered
• the debt is not covered by a formal instalment arrangement
• Inland Revenue has told the company it intends to share the information, and given it 30 days to pay or enter an instalment arrangement

Inland Revenue has had the power to do this since 2017. In October 2025 it removed internal restrictions that had held it back, and began a pilot with selected companies.

So there are still plenty of circumstances where you will not have full visibility. A company can owe Inland Revenue a great deal and show nothing, because it has entered a payment arrangement, because the debt is disputed or under a relief application, because it is still inside the 30-day notice period, or because it sits below the thresholds. Sole traders and partnerships are not covered at all. Keep doing your due diligence, and know that there are things in the background you cannot always see. That is exactly why a credit check is one part of the picture rather than the whole of it.

Treat trade references with care

A trade reference and a credit check are two quite different things, and plenty of good businesses treat the first as though it were the second. Nobody gives you, as a trade reference, the supplier they have not paid. A reference is a snapshot from one or two suppliers the customer chose, and it can be out of date, selectively positive, or simply not representative. Ring them by all means. Then run the credit check as well.

Ask who they have been using until now

Who have you been using up until now?

It is a friendly question, and the answer tells you a lot. If they need you urgently because the last person let them down, it is worth asking yourself whether the last person let them down, or whether they stopped paying the last person. The same goes for the other things you notice at the start. Does it feel dicey? Is it a friend of a friend, or family looking for mates rates? Are they already drilling you on price to an unreasonable point? None of those is a reason on its own to say no. Each is a reason to check properly, and to listen to your instinct when it tells you something is off.

Confirm who has authority to commit the business to pay

The person asking for the work is not always the person who pays for it. If you are dealing with a fleet manager, a staff member or a company representative, confirm they have the authority to approve the work and commit the business to paying for it, before you start.

Let what you find set the terms

This is where thinking like a bank pays off. A bank does not simply say yes or no. It decides how much to lend, for how long, and what it needs in return. You can do the same, and make an educated decision about what a customer’s credit limit should be, or whether you provide credit at all.

The best debt prevention tool you have is to not provide credit. That will not suit every customer or every job, so the next best is to provide less of it, for a shorter period of time. A larger deposit, a lower limit, shorter terms, staged payments. It is completely okay to ask for prepayment, particularly if somebody has a bad credit history.

When a director won’t sign a personal guarantee

Some directors will tell you they do not sign personal guarantees, because their company is separate. That is their right. But there is another side of the fence: if they are not willing to stand behind the trade relationship, the question becomes why you should. A guarantee being off the table does not mean you do nothing. It means you manage the risk differently, through prepayment, a lower limit or other security. Different tools, same outcome.

You can also set your own line. For example: once a job gets over the $30,000 mark, we ask for a personal guarantee. Where someone will not sign anything at all, be very wary; where there is smoke, there is often fire. And always give yourself permission to walk away.

Make it standard procedure

The awkwardness most people feel about checking a customer goes away when it is simply part of how you work. Treat it as customer service: this is what we do with all of our clients. We get you to fill in an account application, we do a bit of an assessment, and part of that is a credit check. It is our standard procedure, and it is said as a matter of fact, while the relationship is good and fresh. As you begin, so you mean to carry on.

It does not need to feel heavy or legal. A good start is a welcome conversation: how we work, what you can expect from us, and what we need from you. And the depth can match the exposure. A light customer information form that captures the correct legal entity suits most accounts. A fuller credit application, with more questions, belongs where you are really financing the customer.

Review credit as circumstances change

A check is a snapshot, and circumstances change. Somebody who opened an account with you four or five years ago may be in a very different position now. Review your customers’ credit from time to time, and set up alerts so you are told if a director changes or they stop paying someone else. It is worth a fresh check when an old contact turns up at a new company, when a customer comes back after a long gap, or when a new job carries a different risk from the last one.

If a customer of yours has already gone under, start with what happens to your money when a customer goes into liquidation.

This page describes the process in general terms, from our own research and commercial experience. Do your own research, and get legal advice for your own situation.