Credit Control for Small Businesses

Vet, vet, vet: credit control for small businesses

For any business, attracting new customers is the holy grail of success. And that's particularly true in the current climate, with the bite of the recession leaving companies fighting for every penny.

But while getting a new customer is something to celebrate, you could be left worse off than if they had never come to you in the first place, if they don't end up paying for your services. It's estimated that SMEs are owed nearly £26 billion in late payments - and that doesn't count any potentially fraudulent clients.

There have been moves to improve the speed of payments to businesses, especially from Government departments. But to run the least risk, all firms need to take as much control of their own destinies as they can.

There are a number of ways in which you can check on the status of a client, although nothing is foolproof - Enron was considered creditworthy in the hours before it collapsed!

Credit checks

Just as individuals can be credit scored by the likes of Experian and Equifax, so too can businesses. Running a credit check is quick and relatively cheap, and could save you a fortune in the long run. You'll need to have all the details of your client, such as company number, full address and any trading names. You'll also need to know what type of business it is – i.e. whether it's a limited company, sole trader or partnership.

If your client is a limited company, you can also use the Companies House Web Check service for free to see if their accounts are up to date, whether they have been declared insolvent and so on. If your client is an individual, the Insolvency Register is a free service that lists those who have been declared bankrupt. And a simple Google search may throw up more information about your client.

Get references

If your client is legitimate, they should be happy to give you permission to speak to their bank to check whether they are creditworthy. You won't necessarily receive much information, and unless the company has such a facility set up, there is no way the bank will guarantee any payments. It's likely that if a company is solvent and has a record of paying bills, a bank reference will consist of little more than a statement saying they have been a customer for a certain amount of time and there are no known issues.

You could also ask to speak to other businesses that have had dealings with them - if they pay those bills on time, they are more likely to pay yours too.

Check company policy

Some hugely successful businesses have payment practices that seem designed to put a real squeeze on smaller suppliers. Delaying payments, changing terms and de-listing companies that complain are not uncommon events.

But a code of conduct agreed between Government, business and the Institute of Credit Management has been designed to prevent these unfair practices from occurring. Companies that sign up to the code agree to pay suppliers according to the contract, and businesses can fall back on a complaints process if there are disputes.

Start off slow

With any new customer, it's wise to take it slowly when offering credit terms - give them the opportunity to build up a level of trust and only then extend them the same terms you offer to long-term clients.

Case study

One small publishing company maintains that a zero-tolerance approach to client credit means its bad debts are considerably lower than the industry average.

The firm uses Equifax to credit check every new customer, and usually runs existing clients through the system once a year. If the company fails the check then it is not permitted any credit facilities whatsoever. Potential clients that fail the checks are given the option of paying in advance for their business, and if they don't want to do that then they are turned away.

"I'm sure we do lose some legitimate income through this," says Julie, who is responsible for making the checks, "but that's better than us investing time and money and then having the customer unable to pay."

Coins image courtesy of Flickr user mukumbura
Pelican Poster image courtesy of Flickr user - wsssst
Handshake image courtesy of Flickr user - jeffmcneill