How do you ensure new clients can pay for the services and products you offer?
Borrowing and paying debts or using credit is standard practice for any business. Some businesses have good payment records, whilst others don’t, so it’s important to always check the credit rating of any business before lending them funds or dealing with them.
Similar to an individual, a company can have its own credit rating. A credit rating is a number generated by a mathematical algorithm based on statistical analysis of information researched for a credit report. Here’s how to go about building a credit report that will save you from collection problems in the future.
What to include in the credit check
If the report is for the purpose of extending credit then the following items would be important to include. However, the extent of your exposure would dictate the amount of information required and some credit bureaus allow their clients to choose the information they wish to include.
- Comprehensive company details are important to understand the type of entity you are dealing with. This could affect how you deal with the company and its information, especially considering sole proprietors and small companies fall under the protection of the National Credit Act. It can also affect litigation in the future.
- Comprehensive details of owners/directors/members to obtain details of current and previous business interests and any judgments. If a person has been involved in a number of failed companies or has personal judgments you may wish to be more careful in your business dealings with them.
- Bank code. This verifies that the company’s banking details are legitimate and gives a ‘snapshot’ of the company’s cash flow situation.
- A few trade references will give you an idea of how quickly the customer is paying its other vendors and whether they are handling credit accounts matching what they are hoping to obtain from you.
- Details of preferred creditors. If your exposure is high ie. bank overdrafts, mortgage bonds, cession of debtors, and if you are looking for some form of security from the client, this will establish how many suppliers are already ahead of you and also the number of preferred creditors there are in the case of liquidation.
- If your exposure is high, include further detailed financial information including turnover figures, value of debtors and creditors and audited financial statements.
Should the report be required because you are considering a supply agreement whereby the subject of the report is to become a supplier, the focus of the report would be somewhat different and should include the following in addition to most of the above, as it would be necessary to establish both financial stability and capacity.
- Operational details, which would include major customers, contracts and agencies.
- Details relating to capacity would be important in order to ensure the company was capable of fulfilling your requirements. This would come from type of premises, number of permanent staff, vehicles etc.
- Financial information, including audited financial statements to ensure stability. This may be hard to come by and depends on the disclosure. It may be easier to use an independent company to request it.
- Customer references to establish the reliability and operating style of the company.
How to read and interpret a report
Researching a company’s judgments, bank code, financial information and what suppliers have to say in the trade references may seem to be the most important aspects of a credit report. However, checking on previous or current business interests of the principals, the type of entity or whether the directors have been involved in a previously failed business can often be very telling and a better indicator.
It’s not sufficient to just obtain a credit rating, and by using a professional credit check you will ensure that reports include more information which improves the report’s accuracy in terms of creditworthiness and risk. Using a bureau that is registered with the National Credit Regulator will ensure that the research generated is above board and may well prevent bad business dealings from occurring down the line.
Dealing with cash emergencies
The unexpected can happen to even the busiest businesses. A big customer can be late on payments, or a normally busy season is not so busy. Colleen DeBaise, the author of The Wall Street Journal Complete Small Business Guidebook, shares three ways you can deal with a cash emergency.
Get out there and sell
Jump start your sales efforts to find new customers and work the ones you have. Now’s the time to make sales calls – if you don’t, your competitors will, especially if they learn you’re in trouble.
Review your line of credit
See if there’s any room to borrow. If there’s not, talk to your banker and see if you can increase your ceiling. They might give you the money you need to cover the deficit.
Ask your suppliers for a favour
Remember, you’re a customer too. Talk to the people who provide your supplies and your equipment. See if they can extend your terms or give you a line of credit. After all, they don’t want to lose your business. Now is the time to work those relationships.