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It pays to check the finances of clients | |||||
| The following appeared in The Sunday Times on 28th June 2009. Doing business in the downturn is becoming increasingly fraught for small firms as customers settle invoices later, bad debts soar and credit insurers cut back the cover they are willing to provide. With insolvencies rising every day it can be a real headache for small-business owners to work out whether they are going to get paid for their goods and services. Invoices are now being paid after 23 days on average compared with 20 this time last year, according to figures from the Department for Business, Innovation & Skills. The Importance of Credit Checking The good news is that there is a great deal a small business can do to reduce the risk of bad debts. The most important step is to carry out credit checks on all the customers you supply, no matter how long you have been supplying them and no matter how long-standing your personal friendship with the owner. However, it is not enough simply to run credit checks on customers before you start supplying them. In these uncertain times you need to be able to credit-check them continually because their financial circumstances can change from week to week - as indeed will yours if they are suddenly unable to pay you. Several of the big banks have recently introduced systems to help customers run credit checks on their trade customers, so your first step should be to see what your bank can provide. Barclays, for example, now offers its credit-checking service free to all UK small businesses with a turnover of less than £1m - whether or not they are customers - allowing them to look at their five most important clients. An unlimited checking version is available for a small monthly fee. Since Barclays launched the service in November it has alerted its customers to 68,000 county court judgments and 27,000 companies being wound up. Stuart Mills owns Colprint, a Birmingham printing company that specialises in letter-heads, business cards and leaflets. He started credit-checking his trade customers a year ago using the Barclays system. He estimates that he has since saved about £4,500 in bad debts that he would have incurred. Mills put the details of all his trade customers into the system and now receives an automatic e-mail from the bank every Monday morning listing any whose credit status has changed in the past seven days. "The print trade is notorious for bad debts and getting the e-mails has made me review my customersý credit limits and reduce them," said Mills. "We tend to lose about £5,000 a year in bad debts and we are only a small company with turnover of about £350,000, so it is significant. But last year I wrote off £500." As well as the Barclays credit-checker, Mills also uses a system to give him information about the directors of a company. And he now always sends out a letter stating his terms and conditions to all his customers, something that he would not have done in the past. Ken McKenzie, the owner of McKenzie Electrical Services in Northampton, has also started credit-checking all his customers and using the information to decide what level of credit to offer them. In practice, this has meant reducing the level of credit he is prepared to offer from 30 days to 14 and in some cases demanding payment upfront. He said: "I am a convert to the importance of credit checking. It is a no-brainer." According to Barclays, about one-third of small firms said that customers failing to pay on time threatened their day-to-day survival. Their survey discovered that 36% - equal to about 1.5m small businesses in the UK - had to use personal funds to tide over their companies while they waited on outstanding payments. "Credit checking deals with two of the biggest causes of business failure - bad debts and late payments," said John Davis, marketing director of Barclays Local Business. "It gives entrepreneurs an edge that could be the difference between success and failure. We think it´s one of the most powerful tools at an entrepreneur´s fingertips." Mark Henstridge, head of risk at Atradius, one of Britain´s biggest credit insurers, said there was a lot that small businesses could do to protect themselves from credit risk. "Invariably we find that businesses are very good at trying to collect the money when it is overdue but what they forget is that the first step is to check whether the firm they are doing business with actually has the financial ability to pay them," he said. "Small businesses can do a lot to help themselves. If a small business is not actually being paid for something that it has provided, it is not business, it is a debt." Lloyds Banking Group has also introduced an online credit-check-ing service, First Check, for its customers, which provides credit opinions on 3.5m firms in the UK. Paul Glover is a co-owner of ICS Waste Management and Recycling, a waste-management firm in Mansfield, Nottinghamshire. He uses Lloyds credit-checks. "We now credit-check everyone, something we wouldn´t have done a few years ago," said Glover. "It is very easy to use and it gives us a bit more confidence in the current climate. It allows us to decide whether to give a customer a credit or cash account. We are a lot less lenient than we used to be. You have to fight your own corner and make sure you can ride the storm." Useful Resources The Department of Business, Innovation & Skills has produced a series of guides on Managing Cashflow. They are available at http://www.credit management.org.uk/berrguides.htm. Yuill + Kyle have their own dedicated crediting checking website at www.ykcreditcheck.co.uk. Questions? This article, along with many other news articles can be found on our website www.debtscotland.com. Should you have any questions or comments then please don´t hesitate to contact me using the details below. Best regards, Stephen Cowan Managing Partner Yuill + Kyle Debt recovery + Credit control Lawyers, Scotland scowan@yuill-kyle.co.uk W: http://www.debtscotland.com/ T: 0141 331 2332 Debt Recovery Ignited! | |||||
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