by scowan
3. August 2010 23:53
Why should your customer's identity be important?
Confusion over trading names
If you contract with a limited liability company be sure you record its correct name. For example you may contract with John Smith & Brown Limited. It is perfectly permissible for John Smith & Brown Limited to have a trading name totally unrelated to its registered name. For example it could trade as "Country Catering". It is important that you identify with whom you are trading as judgement against Country Catering will be totally ineffective as that entity does not legally exist. Proper investigations should reveal the legal identity of your customer and this is an extremely important function which a business' credit control must perform accurately and expeditiously.Similarly a partnership or sole trader may trade in their own names or in a business descriptive name.
How can you assess what a customer is worth?
Remember a sale is only a sale once it has been paid for! The best way of assuring you do get paid is to assess your customer's ability to pay what is due to you within their credit limit. This is known as assessing the credit risk and once completed you will be able to assess credit terms and credit limits. Your criteria will vary depending on the assessment's result. For example you would only supply on a cash only basis if you thought your customer were shortly to proceed to insolvency. A different response will apply where your customer's liquidity ratio was improving.
Yuill + Kyle have their own credit checking website at www.ykcreditcheck.co.uk. This site utilises the largest UK credit check database to provide you with up to date reports on any UK business. The range of credit reports on offer will help you gain more insight into your customer’s credit history and risk.
How do you assess your customer's credit risk?
There are various "self help" measures you can take to evaluate the risk you are taking in supplying goods or services on credit. Amongst these are some practical measures which, if taken, should go some way to ensure you receive payment once credit has been extended. The following list, although not exhaustive, should assist:-
• Ensure your customer completes a credit account application. [To view sample credit account application visit: http://www.debtscotland.com/docs/App1(Credit%20Application).doc
• Carry out a credit check. Credit checks can be purchased from www.ykcreditcheck.co.uk. This site utilises the largest UK credit check database to provide you with up to date reports on any UK business
• Set your credit terms once you have received the report and credit application form back.
• Send a letter to your customer once the new account has been opened. To view a sample letter visit: http://www.debtscotland.com/docs/App2(Letter%20to%20customer%20re%20new%20account).doc
• Consider joining credit circles and other industry groups. Credit circles basically are closed industry groups, open to invitees of similar industries or businesses, passing confidential information amongst themselves concerning prospective customers.
• Once a credit risk has been established there should be some objective criteria within your organisation to allocate a risk category to each customer. Such risk categories can be categorised as follows:-
1. No risk - this could apply to Government departments and blue chip companies.
2. Standard trade risk - this will include all those not included in categories 1 and 3. Limited companies, partnerships and sole traders having a sound financial backing will form part of this category.
3. This will be high risk customers and could apply to, for example, customers who are always late in paying their accounts or those who have judgements registered against them.
Why should you take up bank and trade references?
It will be prudent for you to take up both bank and trade references.
Trade References
What you are attempting to do is to ascertain objective third party criteria as to your customer's worth. Much debate has taken place as to their value. Will a prospective customer really provide you with a trade reference which he considers will be unsympathetic? You should bear this in mind and if possible try to get trade references from blue chip companies if these are available. Also you should recognise your customers probably have their own important sources of supply who must be paid on time. Presumably there could be a tendency for such organisations to be offered as references rather than suppliers who are kept waiting for payment.
Bank references
Bank references provide their own difficulties with the financial institutions being quite circumspect as to what they mean when the references come through. Remember a bank reference is only an opinion and will not guarantee payment as it is based on the bank's review of their customer's account performance.