Customer due diligence is the process of evaluating a prospective client’s circumstances to ensure that doing business with them is within the level of risk that the company is willing to take. This process begins when developing a contact list for a sales team and continues even after a relationship has been established. It helps minimize the amount of accounts receivable that go into overdue status and reduces expenses incurred in trying to collect bad debt.
Client due diligence is a term used to describe the processes and procedures used by a business to qualify a prospective client prior to establishing a business relationship, and is also used to continue qualifying that relationship once established. The idea behind customer or customer due diligence is to evaluate the customer’s circumstances and make sure that doing business with that customer is within the level of risk that the company is willing to take in exchange for the benefits of establishing and maintaining that relation . At best, this type of due diligence prevents companies from protecting customers who are ultimately unable to meet their obligations and creates a certain degree of financial hardship for the company.
There is some difference of opinion as to when the customer due diligence process actually begins. One school of thought holds that the first stages occur when developing a contact list for a sales team. As part of the process, efforts are made to determine if there is a reasonable possibility that the prospective client would be interested in doing business with the firm. If so, further investigation focuses on the prospect’s general business operations and that company’s overall reputation in the industry. If the prospect appears stable and financially sound, the sales team proceeds to contact and attempt to gather additional information that helps bring the contact one step closer to establishing a customer/vendor relationship.
As the time for the closing of the sale approaches, customer due diligence will mandate a closer look at the prospect’s financial situation. This often means obtaining credit reports and other financial data that help the salesperson assess the degree of risk associated with doing business with that prospective customer. Due diligence in this regard will likely be particularly thorough if the new account would involve the creation of a revolving credit account type, with the research findings helping to determine the credit limit on that account.
Assuming that the customer’s due diligence demonstrates that the prospect is creditworthy and that a relationship has been established, this does not mean that the vendor believes that the due diligence is complete. Many companies will review credit accounts on an annual basis, pulling up credit reports and other information to determine if it is still in the company’s best interest to do business with a particular customer. Attention is also paid to trends within the economy or the appropriate business sector to determine whether a client’s fortunes could reverse in the near future, allowing the company to limit credit and minimize the chances of incurring a loss. Ongoing customer due diligence helps limit the amount of accounts receivable that go into overdue status as well as minimize the number of customers that are ultimately sent to collections, a move that not only helps protect the revenue stream but also reduces also other expenses that would be incurred in trying to collect what could ultimately be bad debt.
Protect your devices with Threat Protection by NordVPN
