Whether you are a start-up business or a long-established business, it is vital that you always perform due diligence on new suppliers to avoid financial risk.
Whilst you may be opening new opportunities for your business by extending credit to suppliers or new partners, if you do not perform comprehensive background checks you are leaving yourself open to a range risks.
The risk that is most obvious is the financial risk of not getting payment but there are also other risks such as reputational damage and indirect involvement in money laundering activity or fraud.
Reducing financial risk through company checks
Chasing invoices is one of the worst parts of running a business and is a very time-consuming and avoidable task. When you want to be getting on with the important work that drives your business forward, one way to reduce the invoice chasing and the risk of non-payments is to run appropriate searches during your onboarding process.
The most common searches to conduct include credit check, director searches and administration / insolvency proceedings.
A business credit profile will provide you with information such as bank accounts, credit cards, suppliers etc. The profile will contain details of when accounts were opened, payment history, outstanding balances and any past due accounts.
You will also be able to see whether the company has had any bankruptcies, CCJs or any other type of lawsuits. This should give you a good idea of the financial stability and reliability of a supplier before you decide to provide them with any credit.
Where to go for business information
Some information is available online, most company registries in Europe are open to public and can be used to conduct basic searches to establish whether the company exists and the information they’ve provided matches official records.
There are then commercial data sources which you may have already heard of such as Equifax and Experian, as they also provide personal credit reports as well as business credit reports. There are also more specialist data providers such as GlobalX who can conduct searches of the Companies Court for pending insolvency proceedings that would appear on any public databases.
Once you have received the credit report for your potential supplier, you can decide whether you want to go ahead with agreement. Where you make the decision not to take the risk with the supplier due to their credit report, you should write to them with a polite note. This should advise that you are not able to provide them with credit but that you hope to continue working with them through alternative options such as cash payments.
Other considerations for working with new suppliers
As well as looking at the financial risks, depending on the type of business you are running, suppliers could potentially affect your professional reputation. Therefore, you might also want to do some additional checks to gauge their professionalism and how they are perceived by customers and/or the general public. For example, you could check for online reviews and ratings on Trustpilot and similar business review sites.
The company’s website and social media accounts will also reflect their level of professionalism, so it is worth checking these too. Look at not only what customers are communicating on social media but also how the company responds, as this is a strong part of online brand reputation management.
For the relevant industries, trade associations and licensing boards can be checked as well. They will probably disclose any memberships on their website but you can double check the details.
Before you start working with any new supplier, it is a good idea to take a cautious approach and never agree a large amount of credit to a company you know little about. By performing the checks listed above, you should be able to get a better idea of whether it is too big a risk to work with a new supplier.
