What is a client credit assessment?

Client credit assessment is the process of evaluating a client's ability and likelihood to pay for services, typically performed before extending credit or undertaking significant work. For professional service firms, credit assessment helps prevent bad debt by identifying high-risk clients who should receive limited credit, require deposits, or be declined altogether.

Key characteristics

• Evaluates the client's ability to pay

• Performed before extending credit

• Uses financial data and references

• Informs credit limits and terms

• Identifies high-risk relationships

• Should be updated periodically

Why it matters for professional service firms

Not all clients are equally creditworthy. Performing significant work for a client who is unable to pay creates bad debt. Credit assessment before engagement prevents this loss. Professional service firms should assess credit for new clients and periodically for existing clients, especially before major engagements. Assessment informs decisions about credit limits, deposit requirements, and payment terms.

Real-world example

Brian's firm took on a $120K project for a new client without a credit assessment. The client filed for bankruptcy during the project; the firm collected only $25K. Implementing credit assessment: new clients are reviewed using financial references, credit reports (for larger engagements), and payment history research. Assessment categories: A (standard terms), B (reduced credit limit), C (deposit required), D (prepayment only). The client that defaulted would have been assessed as C or D with a deposit requirement, avoiding the $95K loss. Assessment became standard for all new clients and large engagements.