Knowing your customers and suppliers’ financial status is important. If you give or extend credit to customers, or your operations rely heavily on a few suppliers, their cash flow and operational problems can quickly become yours. Whether you’re about to build a new relationship or have been in business with them for a number of years, it’s vital to your business’ financial risk to have an understanding of their situation. A survey by ComRes (2014) revealed that only a third (33 per cent) of UK SME financial decision makers check a supplier’s credit report before doing business with them; and a third (34 per cent) of UK SMEs conduct a credit check on new customers before taking them on. Credit checking is a simple and quick way to protect your business and minimise your chances of being exposed to financial risk.
Research your customer or supplier
You wouldn’t lend cash to a stranger you didn’t know so why would you extend credit to a company you know nothing about and trust them to be who they say they are? Before offering credit or entering into contracts with suppliers, conducting a few simple online searches could save you a lot of time and hassle in the future.
- Take a look around their website – see if what they’ve told you matches up to what they’re telling other customers and suppliers.
- Conduct a general search of their company in search engines – they may have been mentioned in the local news or been associated with other businesses in some way; it could give you an idea of the sort of activities their business engages in and their reputation.
- For limited companies, you can do a check of them at companieshouse.co.uk to find out whether their company actually exists and how long they’ve been in business for.
Credit check them
You should be checking how creditworthy a customer or supplier is before entering into business with them. The importance of business credit ratings is an issue that is often referred to but not taken seriously enough or because of the lack of information available, isn’t an issue businesses tend to put at the top of their list to address.
A credit report from credit reference agencies such as Experian Business Express contains lots of useful information such as a business’ current financial status, their credit and ownership history. It also allows you to see their payment performance to get an insight into how quickly they’re paying their customers and suppliers and any adverse information such as CCJs. It provides information on credit limits and scores to help you make calculated decisions on whether to enter business with them and if you do, how you can tailor your credit terms with them to minimise your financial risk.
Credit checking shouldn’t just be something you do once to be forgotten about afterwards; you should be keeping an eye on any changes in your customers and suppliers financial status or business data. Experian Business Express’ monitoring system does exactly this for you, choose the customers or suppliers you want to be alerted on and which changes you want to know about and you’ll receive an email if anything changes. Not many businesses will take the initiative to tell you themselves that they’re experiencing financial problems or that there’s been a big change in the ownership of their business. By monitoring them, you can be proactive in protecting your business so you can take action before it’s too late.