Safeguarding your business against clients who pay late or not at all is difficult at the best of times. Yet with some forecasting 2011 to be a bumper year for insolvencies, it’s going to be more important than ever for SMEs to know how much credit, if any, should be given to their customers. This will also include checking historically financially-sound customers with a good payment record who may now also be at risk from the rapidly changing economy. So what can companies do to ensure they have the best picture of their customers’ financial health? Credit rating agencies Businesses have traditionally relied only using credit agencies to check the financial stability of a customer. Through these, they can obtain a rating or suggested limit for the relationship from publicly available information. However, when we carried out an investigation into three well-known credit rating agencies, Dun & Bradstreet, Experian and Creditsafe, we found huge disparities in the numbers suggested for ratings and limits for different SMEs. For example, one recommended no limit for a company, whilst another recommended a credit limit of £50,000 for the same company. In the case of another, one credit agency recommended a limit of £43,000, whilst another agency recommended a credit limit of a staggering £17.5m. This is particularly worrying for business owners, as it seems that figures given by credit agencies on customers are a “lucky dip”, depending on the agency used. An incorrect credit rating could mean that you continue servicing a customer that you believe to be financially stable, but may be unable to pay. Businesses must therefore look at the scale and nature of the relationship and identify the financial impact on their business should the customer fail, and check other sources if it is significant. Other sources In the current climate, customers will not take exception to being asked about their financial position, so don’t be nervous about asking for additional information. This information can include:
the latest management accounts
a business plan
confirmation of liquidity
professional references from sources such as a bank
A full assessment of the customer can be carried out either by the accounts department or external accountants once this information has been received in addition to the rating from the credit rating agency. If the assessment isn’t satisfactory, the credit terms provided to the customer must be reviewed. If you’re not comfortable with the financial stability of the customer once the above has been completed, it’s wise to use other tactics including asking for money on account, or pre-billing project work. Credit checking all customers – both present and future – will be crucial for businesses wishing to weather a financially stormy year. We urge businesses to credit check their customers thoroughly, and to assemble all pieces of the jigsaw to see the full picture before giving credit, which will help ensure payment at the end of the job. Bobby Lane is a partner at Shelley Stock Hutter LLP. Shelley Stock Hutter LLP was established in 1989 and is based in London’s West End. Picture source
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