Prevention Is Always Better Than Cure…why Credit Checking Is a Now a Must for Every Modern Business

How do you make sure clients and suppliers pay up on time? And what do you do if they don’t? Here, Natalie Barron from Commercial & Domestic Investigations outlines the importance of the approach and offers practical advice for SMEs experiencing late payment problems.

How do you make sure clients and suppliers pay up on time? And what do you do if they don’t?

These are problems all businesses face – and with £55 billion of outstanding invoices* currently owed to British SMEs, experts say investing in a professional credit checking service to screen the financial health of customers before starting work with them will save considerable time and money further down the line.

Prevention Is Always Better Than Cure…Why Credit Checking Is A Now A Must For Every Modern Business

At the same time, continuous or spot checks can provide a useful snapshot of clients’ finances in the long-term, help identify slow payers and prevent disputes.

Here, Natalie Barron from Commercial & Domestic Investigations outlines the importance of the approach and offers practical advice for SMEs experiencing late payment problems.

Care for your cashflow

“As a start-up, undoubtedly the biggest issue people have to get to grips with quickly is cashflow. Time and time again, we hear of late payments, ignored payment terms and sometimes, non-payment altogether. It’s something all businesses battle with and can easily send small businesses under if it’s not managed precisely.

“It’s easy to get carried away when you get a new business opportunity through the door and sign a new customer or client up straight away, without looking into their financial history and checking out whether they’re ‘good for the money’. More businesses are asking for payment upfront in times of economic insecurity to counter this – however, as you can imagine this request if often declined as people want to see the quality of the work before they pay. If you can come to an agreement of a deposit of some sort, perhaps half upfront, then that would be beneficial.

“We’ve seen clients relying on their own credit cards and in turn, delaying their own payments to suppliers because customers haven’t paid when they said they would. The knock-on effect is huge. First of all, make sure you understand your customer’s payment terms – there is evidence of some larger organisations exploiting their supply chain and extending payment terms unfairly. So if you’re an SME taking on a large customer, think carefully as to whether you can afford to fund the payment gap – my advice would be don’t take the business. Dispute any unreasonable payment terms from the very outset if you’re unsure, before drawing up the contract. Always, always, get a contract signed or something in writing before you start work, to protect you legally.

“Good housekeeping is the obvious. Invoice promptly and accurately and get to know customers’ payment systems and personnel. If this isn’t your strong point, commission someone good to do it for you. It’s vital to the long term success of your business.”

Safeguard from the start

“Before any work commences, the best thing you can do to safeguard your business is to run a credit check on the prospective client. Find out their payment history; have they run into difficulty before, are they in the red, have they any court orders against them? These are all signs to stay clear. And sometimes even well-known, established brands can have a dodgy financial record, so don’t be fooled. It’ll save you a lot of pain and improve your company’s efficiency in the long run.

“Smart businesses are using preventative tactics when managing their credit risk. A credit check gives you vital insight into a customer’s sales, operational and financial composition, minimising the risk element and giving you assurance of the overall health of the company you’re going into business with. You need that confidence to make an informed decision about who and who not to work with, and avoid the pitfalls of late payments and bad debt. It can be crushing if it goes wrong – don’t risk it.”

Keep an eye on it

“Credit checks shouldn’t just be run at the start of a project and then forgotten about. Regular checks once you’re up and running with a customer mean you’re alerted to any changes in clients’ circumstances that could lead to non-payment in the future, and ultimately insolvency.”

Tackling late payments

“UK and EU late-payment legislation entitles you to charge interest on outstanding debts.  You don’t have to give notice to do so either – just invoice for late payment charges. Invoking this legislation or pursuing debts through the small claims courts could also work for you if you have reached the point when you’re prepared to walk away from the relationship and your case is solid.

“Outsourcing to a credible debt collection agency which specialises in SMEs is also a common and effective ‘go to’ method for dealing with persistent late payers. Speak to them early on and put a reassuring plan in place.”

Learn and grow

“We’ve learnt so much from this recession. Now we’re coming out of it, don’t forget those important business lessons – always take protective measures against bad debts through quick and regular credit reports. More and more businesses are seeing the benefits of this, rather than relying on cures such as invoice discounting and debt collection – but then with £55 billion worth of late invoices in the UK, there’s clearly a huge way to go. Use business intelligence available to you to help manage risk effectively and identify opportunities that allow you to transact with confidence and enjoy sustainable growth.”

Commercial & Domestic Investigations is one of the leading credit management companies in the UK. Set up in 1988, it now has a national client base of over 20,000 companies, including sole traders, SMEs, Ltds and PLCs.