We seem to live in a world that requires instant gratification. The email we just received needs an immediate answer. If our laptop doesn’t respond in less than a second, we get annoyed and start thinking about replacing it with a faster model.
Unfortunately, this can come at a price. Far too many British businesses forgo conducting due diligence on new and prospective customers, exposing themselves to late payments and, in some circumstances, fraud. In the case of the latter, SMEs suffer a range of deception including customers who never intended to pay, and those who use bogus credit card details.
It’s important to remember that receiving an order is only the first step – you shouldn’t make the mistake of getting too excited without taking steps to verify whether your customer will pay. Taking the time to check out new clients, getting references, obtaining commercial credit reports and meeting face-to-face at their place of business can improve cashflow and save you serious headaches later on.
Here is how such simple steps can make the difference between an unpaid invoice and cash in the bank:
Credit checks: commercial credit reports provide useful financial information on your potential customer as they offer an insight into how they handle their business dealings. Credit bureaus monitor how a business pays their bills, the lines of credit they use and whether they’ve been a good borrower.
Based on this information, a basic credit report will provide you with a credit score and credit limit, which indicate how creditworthy a person or company is and the amount of credit they should be able to repay. There is also information on any county court ruling against the business, so you can see if there has been a history of problems of repaying debts. A credit report only offers a snapshot of the customer’s financial health at that time, so conducting regular checks is advisable.
Research: it may sound obvious, but the first step should be to meet the client face-to-face. Ideally, you’ll get to do this at their headquarters so you can get a feel for the type of business they run. A meeting in person enables you to assess the other party and determine if you are comfortable dealing with them. This is more about going with your gut feeling: if you are not comfortable with the individual, you should think twice before engaging in a business relationship.
Beyond this, supplier references – where you contact other businesses that supply services or products to your potential new client – are one of the most valuable but underused means of due diligence. Many business owners shy away from asking for supplier references, for fear of insulting a new client. But if the customer has nothing to hide then there shouldn’t be a problem, and what better way of learning how the client treats its suppliers than by speaking to them? Be sure to obtain a number of references – that way you reduce the risk of being offered the one supplier they’ve a good relationship with, and can be confident they’re in good standing with most, if not all, of their suppliers.
Remember, the internet and the ever-growing profile of social media platforms can provide a lot of information about your potential customer. Take the time to look at the business and see what people say about them.
Be prompt and stay in touch: if you want to get paid on time, make sure your documentation is in order and issued on time.
It also makes sense to know who pays the cheques and establish a relationship with them. It’s your customer, so it’s up to you to create a rapport – after all, you want another order. If the account goes past due, don’t hesitate to get your collection follow process working at once – slow payments lead to bad debts and worse. Don’t accept excuses.
If you become the victim of fraud or non-payment, then it’s most likely that there is a chink somewhere in your due diligence processes. Remember that prevention is better than cure. Establish a methodical process and ensure your staff are trained to the point that it becomes second nature.
David Banfield is the president of The Interface Financial Group
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