One of the major challenges facing small businesses is customer invoices going unpaid for weeks on end and causing significant cash flow issues. It is no wonder, then, that owners of these businesses might be hesitant to give credit to customers when they don’t know that they will ever see the money they are owed.
Think about it – do you really know who you’re giving credit to? How do you know if they have the resources to pay it back? Is this going to be money you and your company never see again? You would probably only offer credit to a client that is having cash flow problems of their own, so there is a real risk that you might not see the money again. At the very least, it’s important to assess the credit risk of new customers.
It is vital that businesses perform credit checks on anyone they’re considering extending credit to, and those people might well expect to undergo one. The majority of high-street banks now offer credit checking services to customers that hold business accounts with them. Additionally, credit checking agencies such as Experian offer various ranges of options for SMEs.
These checks will reveal nothing more than a snapshot of the customer’s financial status, in addition to whether there are any county court judgments against them and whether they have previously failed to make any other payments, but they could make all the difference in terms of you getting paid or not.
This should be a regular activity, not just a one-off, and remember that a good result once doesn’t necessarily mean a good result all the time – circumstances can change, and if you’ve had a reason to doubt someone’s ability to pay once, things may well have got worse for them since you last dealt with them. There’s nothing stopping you doing business with them as long as you make sure they pay up front – if they refuse or are unable to, don’t deal with them.
It can be beneficial to meet a potential client face-to-face in order to more effectively gauge the state of their business and whether you want to deal with them. The accounts might look good but they might be disguising the true picture of the business, which may become more obvious if you visit its premises or meet its key personnel.
Use government records
Limited companies are required to provide various pieces of information about themselves for governmental records, including their registration number, the year they started trading and whether there are any current insolvency proceedings against them. This information might not seem important, but it can give a decent level of insight into the company – for instance, if the company only starting trading in the last couple of years, it might be a startup and therefore more of a risk to extend credit to because it might not be particularly stable.
Ultimately, all you can really do is make a well-informed guess about whether a customer you have given credit to will actually pay you back. Just because they have the resources to do so doesn’t mean they necessarily will – the more records you can keep about your specific transaction, however, the more likely it is that you will be able to recover your money through legal means if the situation comes to that.