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How to check your customers are creditworthy

A 2011 Experian survey found that seven out of ten small businesses in the UK don't bother to carry out customer credit checks, but they are simple and cheap to do online and can save you a lot of money in the long run. We explain why a rigorous approach to customer credit checking is vital for the protection of small businesses – and it need not be difficult to put a thorough process in place

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Knowing your customers is important, particularly if you're giving or extending credit, as their cash flow problems can quickly become your cash flow problems.

Whether you're just starting a relationship with a new customer, or have been dealing with them for a number of years, it is vital to have a thorough understanding of their situation. Here are some simple, free ways of finding out more about who you're doing business with.

Checking out a new customer

You wouldn't give cash to a total stranger, so why should you be expected to extend credit to a company you don't know? Before you offer credit, carry out an online search for your potential new customer.

Not only will their website give you information about their business, but a search engine such as Google should throw up other references and articles that will tell you more about their activities and reputation. For limited companies, do a free web check at www.companieshouse.co.uk to find out:

  • Whether the company actually exists and whether you've been given the correct company name
  • The company's registration number
  • The year in which the business started trading – if they are a start-up business you might not want to extend credit
  • Whether they've filed their statutory information on time. Poor administration doesn't suggest a well-run business.
  • Whether there are current insolvency proceedings against them.

Credit reports

You should also be looking at the customer's credit report. The importance of finding out business credit ratings is an issue that is often referred to, but rarely properly addressed.

A credit report contains useful information on a business's trading history, credit history and financial history. It also provides a credit rating and limit, and gives you details on the directors' other companies.

You should use this information to tailor your own credit terms to the customer. For example, if their credit report shows that a County Court Judgement against them is outstanding, rather than providing credit, request advance payment via a pro forma invoice instead.

Monitor your customers

You should also be keeping an eye on your customers for changes in their key business data. Business status monitoring is a great way of making sure that you know what's going on in your customer's business. The information is sourced from three main bodies: Companies House, the Courts and credit reference agencies.

No business is going to tell you that it's experiencing financial trouble, changing directors or taking out a bank loan. Business status monitoring does this for you, so that you can put measures in place to stop a customer's issues becoming a problem for your business.

Watch yourself!

Finally, it is also important to buy your own credit report and monitor your own business to find out what others will be looking at. There may even be some incorrect information being held about you, so all the more reason to check and get it put right.

To find out how the Forum can help you improve your cash flow, call the member helpline on 0845 130 1722.

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