Can you afford to take on that new customer?
A new customer is a lot like a first date – exciting, but you don’t know how well you will get on – whether it will be a long-term relationship or you can’t wait to get away.
The big question is, of course, how they will pay. A prompt paying customer may be very valuable to your business, but one who takes their time to pay could actually end up costing your business more money than their orders are worth.
In some cases, you can even find that you can’t afford to take on a new customer simply because they take too long to pay. You need to discuss payment terms, and get them agreed, at the outset – and you need to run credit checks, whatever they promise.
Remember, even the biggest and best-known names can fail. Carillion, Thomas Cook, Barings Bank – they all failed, leaving havoc in their wake.
But you will probably not be able to take on any new customers if you don’t offer some form of trade credit. In most lines of business, you will give trade customers a period of time to pay their invoices - most commonly 30 days. You may set credit limits and the maximum value of unpaid invoices that they can have outstanding at any time but, although you might try to limit your exposure, the fact is that your customers will owe you money, and that can be costly.
It means, in effect, your business is funding theirs.
There is no way to be 100% safe when granting trade credit but there are some steps that you can take to credit check them and reduce the chances of non-payment.
Look at the Financial Information
The first step is simply to Google the customer's name and find out what you can online. Negative news, layoffs and the like might be a sign of a business in trouble and need to be investigated further. Have they lost key customers of their own? Are they restructuring?
Still online, you can visit Companies House.
Companies must file their annual financial accounts with Companies House, and you can use the Government's free service to search for the financial information on UK companies. You can also find a list of all the company directors, and see if any of them have been disqualified or have been involved in other companies which have ceased trading or become insolvent.
Credit bureaux, such as Experian, Equifax and Dun & Bradstreet, provide credit reports about businesses that you can buy when you are considering doing business with a new customer. A credit report provides financial information from a range of other sources such as payment performance information and details of any court judgements against them, in order to present a view of the credit status of a business. A credit limit may be also be suggested.
A reference from a customer's bank or suppliers are less frequently used these days, but can still be helpful.
You will need to use your business judgement on the facts you find. If there are turnover figures, you should be able to estimate how much business they are doing and this might be a pointer about how much credit you should offer.
But be careful. If a new customer approaches you with big orders and expecting a big credit limit as a result, ask yourself why they suddenly want to work with you. Is it possible that they have run out of credit with existing suppliers, and want to start abusing your generosity?
If you do decide to do business, make sure it is on terms that work for you. If you can't afford to work to payment terms of 120 days, say so. You cannot risk the security of your own cashflow. Unfortunately, this means that, in extreme cases, a slow payer will be impossible for you take on, no matter how much work they are happy to put your way or how creditworthy they ultimately are. If you need to extend too much credit, it will make their business unprofitable to take on.
But there is a way to take on a slow payer
Being careful with who you do business is important, but being you are faced with a large and creditworthy customer who will only work on a long payment basis is inevitable in some sectors. There is, however, a way to ensure that your business does not suffer as a result.
Invoice Finance is an effective way to get paid as soon as you issue an invoice. A lender will pay you around 80% of the value of each invoice you issue immediately, and the remainder, less their fees, when the customer pays.
It means having the cash you need to keep your business afloat, while keeping your customer happy. Many businesses find it a valuable way of ensuring they have the cashflow they need – and you can even protect yourself against bad debt with suitable bad debt protection options that can be added onto your facility, to protect you against customers becoming insolvent and failing to pay their outstanding invoices.
Invoice Finance can be arranged in a number of ways, allowing you to tailor your arrangement to your business. Rates may also differ greatly, so it is essential to get the right type of IF for your business, and to get it from the right supplier.
At Rangewell, we can help you find the Invoice Finance arrangement that is right for you, searching all the UK providers on your behalf to see what they are offering. Our service is free – and it could provide your business with a way to take on that new customer, even if they are a slow payer.