More than half of small and medium businesses are putting themselves at extra and unnecessary risk of cash flow problems and insolvency by failing to run credit checks on customers or suppliers, according to new research by Experian.
Previous Experian research revealed that many businesses are now getting paid more than three weeks later than agreed invoice terms, so smaller businesses are under significant pressure to do what they can to mitigate against cash flow problems. The findings come as Experian launches its SME Reputation Index, a survey of over 500 financial decision makers at SMEs across the UK.
By far the most common reason businesses run credit checks on their business customers is to ensure that they are dealing with firms that are financially secure, so they can be sure that they will be paid. Yet the latest research from Experian reveals that only 34 per cent of SMEs currently run a credit check on new business customers before taking them on.
Findings also show that microbusinesses (those with between one and nine employees and making up 88 per cent of the UK’s business population) are the most exposed. Amongst B2B companies, three in five (61 per cent) would not run checks on a prospective customer before taking them on. This is compared to larger SMEs who fared better, with only two in five (39 per cent) not running the necessary checks.
Ade Potts, Managing Director of Experian’s SME business, said: “Given that almost 20,000 businesses became insolvent in 2013, credit checks serve a vital purpose for the long-term success of a business. Carrying out a credit check on any kind of new business partner should be standard practice. This is especially important for microbusinesses, which make up 72 per cent of the UK business population. In most cases, they will simply not have capital or savings to fall back on if they face having to wait months for a payment or, in the worst case scenario, find they do not get paid at all.”
The Index also found that many UK SMEs not only failed to apply checks to their customers, but they failed to check their own suppliers. More than half of UK SMEs (55 per cent) who use suppliers do not run a credit check on a supplier before doing business with them. Of those who did consult credit reports, ensuring the financial security of a supplier was the most important reason, followed by checking security of supply and a desire to know the supplier’s track record.
Phil Simpson, Managing Director of Code Print, a small print-management and promotional-gift business, comments: “Credit checks can be an insurance policy. SMEs cannot afford to waste time doing quotes for people who in the long run will delay or never even pay for the work that is done. Suppliers are a key element of our business and knowing if one of them could go ‘pop’ at any moment means that you can safeguard your business and manage customer expectations quickly, either by negotiating terms upfront or changing supplier in the worst case scenario.”
SMEs should consider the following when taking on new suppliers and customers:
It sounds obvious but, before you start working with a new customer, make sure that you are dealing with a real business. Four out of ten businesses that start up and register never actually go on to trade at all. Beyond telephone and email correspondence, check out the address (in person or using tools like Google Street View) to ensure they are who they say they are and to confirm trading status.
Pay or delay
Once you’ve established they exist, run a credit check on any potential customer, supplier or business partner. This will allow you to check out their credit status, trading history; get an indication of their trading future, and their ability and inclination to pay bills on time.
Just because a customer pays on time, or they have proved reliable in the past, it doesn’t mean you should count on this as a certainty for the future. It is just as important to review the credit position and payment performance of your existing customers as it is for new ones. Monitor on an ongoing basis so that you can take appropriate steps if circumstances change.