How can I find out if a customer or supplier is a financial risk?

It’s important to know exactly who you’re trading with as a small business, whether that’s a customer or a supplier, and good credit management is the basis for helping you find out if they’re a financial risk.

By credit checking your customer or supplier you can confirm the details they’ve provided, finding out about their payment history and overall financial position before you sign any contracts. This helps to protect you from late payers and financially unstable suppliers.

This type of due diligence isn’t only for new trading relationships. Carrying out credit checks on existing customers and suppliers at regular intervals also helps you avoid the knock on effect to your own business if theirs declines.

So let’s look at the type of information you need to find out, and how you carry out credit checks on other businesses.

Supplier due diligence

Supplier due diligence is particularly important if the supplier in question is one of only a few businesses supplying your product or service. If their business fails your own could be put at risk, so how do you credit check potential suppliers in order to protect yourself?

Commercial credit checking

As well as ‘standalone’ business credit reference agencies (CRAs) there are commercial departments within the main consumer CRAs, and you can carry out the credit checking process online.

There may be various levels of information available, such as a ‘basic’ credit report, or more in-depth information that costs a little more. If the business credit check returns a good history of payment and no debt, it indicates the supplier is financially stable and reliable.

These are some of the other checks you may want to carry out, depending on how important each supplier is to your business:

• Check the business information provided to you, including the registered company name, number, and address, and the names of the directors
• Confirm any quality accreditations the company advertises
• Obtain references from two or three other customers
• Carry out research online into the supplier’s business

Gathering information on new customers

You can gather information on new customers in a similar way to your suppliers, obtaining a business credit report from a credit reference agency and requesting references from their bank and/or other suppliers.

Using ‘pro forma’ invoices for several months that demand immediate payment is also a good way to check if they’re likely to pay on time, and is especially useful for new business relationships.

You can also request a copy of their published accounts to check their overall financial situation. If you do so it’s a good idea to ask your accountant to analyse the accounts and financial statements, and help you obtain a clearer picture of their creditworthiness.

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