One bad debt could delay your expansion plans, wipe out a year's profit or cause your business to fail. While most customers will pay their bills, you cannot tell whether they are a good credit risk just by looking.
It is surprising how many small and medium-sized businesses neglect to check credit references. A recent poll revealed that almost 20% of companies never take up credit references and a further 27% do so only occasionally.
When they do carry out checks, many companies fail to do it properly.
Our research has unearthed some alarming results, from the finance director who only credit-checked companies where the managing director wore a beard, to the salesman who considered all Star Wars fans beyond reproach.
The golden rule is to treat all customers equally. Make five basic checks.
The higher the contract value, the more rigorous these checks should be.
Does the customer exist? This is not as obvious as it sounds. It has caught companies out before.
Does the customer have a good payment record? Are there County Court judgments against the company?
Have you followed up references? Don't receive references and then ignore them. Get them from at least one established supplier and one new supplier.
Ask searching questions and, if you are not satisfied with the response, ask for more references.
Have you checked the trade press? This is a good source of information, especially if you're working in an unfamiliar industry sector.
Have you visited the customer's premises? It shows you are taking an interest, and is a chance to assess the business. Make sure you speak to staff there and remember, if something doesn't feel right, it probably isn't.
David Postings is MD of the sales financing division of Barclays Bank. 0800 227 222.