Using credit checks to safeguard your cash

The stability of many companies has been called into question as a result of the fallout from the current downturn. Previously viable businesses have been seen to collapse with little or no warning, placing entire supply chains in jeopardy.

Similarly, personal bankruptcies have skyrocketed in recent months. Individuals are finding it increasingly difficult to repay their loans, with default rates on consumer credit increasing rapidly.

The viability of a business is dictated in great part by its cashflow situation. It is therefore vital that you have a clear picture of your potential clients’ financial situation before extending credit. Credit check and business report services can provide you with the information you need.

Credit checks are seriously underused by UK businesses, often being seen as the preserve of large financial services companies. However, they have important practical applications for businesses of every size, regardless of whether you are dealing mainly with other businesses or with private customers.

If the majority of your customers are other businesses, it is likely that you are already familiar with the lengthy payment terms that have become standard. Furthermore, if you deal with a number of repeat clients, you may well be expected to allow them to pay ‘on account’, with the bill being settled at a later date. In either case, if you are to be confident that you will get your money, you must be able to investigate the financial affairs of the companies with which you are dealing.

There is a wealth of information available on limited companies. Credit check services offer you access to this all important data.

Business to business use

Limited companies are obliged to provide Companies House with annual financial accounts, the details of which are publicly available. There is a wide variety of companies offering services that present this information in a manner that is useful to businesses. These services can be split into two groups: one-off queries and ongoing alerts and analysis.

If you are dealing with a small volume of clients, one-off checks may be more cost effective. These provide you with a comprehensive overview of one potential client’s current and past financial situation. This should give you some insight into the stability of the company, and will enable you to make a decision regarding whether or not to extend credit.

However, a series of one-off reports is not enough for many companies. If you are dealing with a number of repeat clients to whom you are providing goods or services on credit, it is vital that you are kept up to speed on their financial situation. In order to help you achieve this, many companies offer a ‘real-time alert’ service which will provide you with up-to-the-minute information on your customers. This is right and proper; if you are doing work on credit, you must be able to manage your exposure. Credit alerts make this process easier, by informing you in real-time of important events that might compromise your clients’ ability to pay. This is a potentially far more cost effective solution if you have a large number of repeat customers.

Private customers

Credit check services are also valuable for companies that deal with private customers as opposed to other businesses. If your company provides services on account, or extends credit to private customers, it is vitally important that you take steps to ensure those customers are going to be able to make their repayments. Again, credit check services should be your first port of call.

Unlike companies, individuals’ financial histories are not the subject of public scrutiny. You will therefore need to enlist the services of a credit reference agency if you want access to customers’ details.

Experian and Equifax both offer services to keep businesses informed about the financial situation of their potential customers. This is particularly important during the initial stages, when the customer’s application is first processed. Both agencies are able to automate your application process, meaning that every potential customer will be scored against a series of criteria with a view to minimising bad debt and keeping your risk down to sensible, manageable levels.

Finally, you should also give consideration to the potential for fraudulent applications. Fraud is amongst the biggest causes of lost revenue for creditors, and must therefore be taken seriously. There are two main agencies, distinct from Experian and Equifax, which deal with fraud in credit applications - CIFAS and National Hunter.

CIFAS holds information on confirmed previous fraudulent activity. This information is shared between CIFAS members, and appears on reports from Equifax and Experian. National Hunter, on the other hand, collects data from previous applications in order to spot inaccuracies and potential fraud on new applications. National Hunter data does not appear on credit reports, and should be sought direct from the agency.

If you are extending credit to customers or clients, it is off the utmost importance that you are sure they can pay. Remember, though, that consumers have rights and you must get a customer’s permission before you can perform a credit check in accordance with the Data Protection Act.

Although credit checking services come at a cost, you should remember that they are likely to save you money in the long run. If you have previously suffered with defaults and missed payments, you will understand the costs associated with bad debts. A well run risk management process, underpinned by efficient use of credit reference data, should ultimately save you money and help to ensure that your cashflow situation is as stable as possible.