Top tips on securing your cash flow through customer screening.

The financial stability of your business is of paramount importance and is directly linked not only to the customers you are able to get but, vitally, to whether or not these customers help or hinder your business' cash flow. 

Be prepared

Prepare a form for potential customers to complete.  Knowing your customer is essential to improving your credit management.  You need to have a clear picture of who you are dealing with, so make sure you ask for:

•    The full name and address of the business and any trading names.  Is it a limited company? A sole trader? A partnership?
•    How much credit is the customer asking for?
•    Who is the person contactable for your customer in relation to payment queries?
•    Ask for bank account details and consent for bank references, credit references, and at least two trade references.  Getting consent is necessary when obtaining credit references for individuals (e.g. sole traders)  in order to avoid falling foul of the Data Protection Act.

Use the resources available

Learn about your customer: this won't take long but at a later date the small investment in money, time and effort will be worth it:

•    Get references: contact your customer's bank and a couple of their suppliers. Get a credit reference from an agency such as Experian or Equifax.  Businesses tend not to take advantage of the resources available, especially in relation to obtaining credit references.  It doesn't matter what size your business is, the practical application of a credit check to your business is important no matter who you are trading with.
•    If your customer is a limited company, look on the Companies House Web Check Service for free to see what other information you can glean - is your customer late filing its accounts?  Is it solvent?
•    If your customer is an individual, check the Insolvency Register for free - this lists individual bankruptcies and individual voluntary arrangements.
•    For a small fee, do a search on Registry Trust Limited.  Find out whether the customer you are dealing with has a history of county court judgments.  You may be pleased to have a new customer, but if they aren't going to pay their bills they are of no benefit to your business.
•    Use internet search engines - enter the customer's name and see if you can find anything.  They may have been in the local newspaper, featured in an article or even been reviewed by another supplier.

Avoid Bad Debts

With the information you have gathered, decide what payment terms you are willing to offer.  If a customer has a bad credit history, you will know not to extend credit to them.  People in business know that bad debts can be crippling.  Small investments of time and money at the outset of all of your business relationships will be worthwhile investments, even if you are saved from just a few bad debts.  Aside from the financial loss incurred due to the bad debt if it must be written off, there are also the associated costs, wasted time, stress and inconvenience in dealing with any bad debt. 

Be Successful

Improve and tighten your credit control procedures: doing so could be the best thing you ever did for the life and success of your business. 

Marie Therese, Paralegal at Thomson Snell & Passmore