Do you really know your customer?
Improve your credit checking toolkit
When you’ve made a sale to a customer and they promise to pay you later i.e. on agreed terms, you’re always taking a risk of not getting paid on time (or at all). We all know this, and most of us assume that it’s just one of the known risks of doing business that we have to accept.
Before most of us sell to a customer, we’ll be doing some background checks on who we’re dealing with. To a lot of companies this is fundamentally:
1. An assessment of the current and historical relationship with that customer; and
2. A financial check-up from an online credit reference agency or your own assessment.
Apart from what your terms of trade say in the underlying sale contract, you’re then governed by a myriad of external forces as to whether you get paid on time. These could include:
• your internal processes for collecting what you’re owed;
• industry norms common in some sectors;
• how important are you as a supplier to that customer and could you be swapped out easily to another supplier? Or;
• how much cash pressure is your customer under?
All too often when we see customers not paying suppliers what they’re owed, the guilty customer passed the company’s own credit assessment at the point of sale.
So is there more you can do at the credit-checking stage? Yes.
Recently, we spoke to a company sadly owed a lot of money from their customer who had entered insolvency. We discussed what they would do differently next time because they’d effectively passed the initial credit check.
So we wound back the clock and imagined we were going to make a new sale to the business in question. What types additional checks would we do this time around?
We started with the main director. Let’s call him John Smith-Taylor. John was listed at Companies House as having a sole directorship in the insolvent company. Bad luck that things hadn’t worked out for him, right?
Not at all.
Upon further investigation, we found that the same gentleman had also recorded himself at Companies House under a slightly different name by dropping the hyphen in his double-barrelled surname.
When we looked at the background of “John Smith Taylor”, it transpired that this second (and more suspicious character) was listed as the director of 27 different companies of which 11 had been dissolved. Ouch!
Ask yourself the question again… would you sell to this person on a promise to pay in the future?
The answer’s subjective because it depends on your own appetite for risk. But what it should do in all cases is drive the sale process in a way which attempts to mitigate the potential risks to ensure you're not the guy who doesn't get paid.
In the instance of selling to John Smith-Taylor, the new information should have crafted the terms of trade very differently to those actually granted.
This type of background check is only one of a number of tools and techniques available to you as a seller to improve your knowledge and reduce risk when you make a sale to a customer with a promise to pay in the future.
If you want to talk about the credit risk in your business and understand what else you can do, tell us more by completing our online form or emailing us at info@branta.co.uk and we’d be delighted to talk through your processes.
