The risks of choosing suppliers without checking them out first
Most business owners rely on other businesses to supply them with the goods and services they need to run their own business. When a business is looking for suppliers, especially for larger purchases or projects, it is easy to focus on finding the right products at the right price. However, it is important not to overlook the financial stability of these suppliers, because choosing suppliers without first checking their financial stability can be risky and could potentially harm your own business. It is advisable to conduct some discreet checks before entering into a business relationship and in so doing, avoid doing business with an entity that may be facing Insolvency.
In this article, we look at why you should always conduct a check before you choose your business’s suppliers. We are grateful for the help we received writing this article from Diane Bantten of Poole based Acquit Debt Recovery. Diane has many years of experience in this field and advocates due diligence before entering into any business relationship.
Red Flags to Look Out for When Choosing Suppliers
Some of the more common red flags to look out for that could indicate that a supplier is financially unstable or potentially trading fraudulently include:
- A high and increasing number of customer complaints or negative reviews – easily viewed on review sites.
- Overdue payments or regular requests for extensions of payment terms
- Poor communication and lack of response to emails and phone calls
- Sudden/unexpected changes in pricing (increases) or (reduced) product availability.
If you notice any of these red flags when working with a supplier, now is the time to take a closer look at their financial stability by conducting a credit check.
How do I conduct a Credit Check on a supplier?
A credit check will help you assess the financial stability of a supplier or potential supplier, and therefore identify any potential risks. There are some of the steps that can be taken:
- Gather information. To start with, you will need to gather key, basic information about the supplier, including the legal name of the company, registered address and registered company number. More relevant and helpful, of course, is tracking down the trading address and obtaining references. As a starting point, checking on-line business reviews is also worth doing to get a flavour of how a business is regarded.
- Choose a specialist credit reporting agency. The agency should have experience working with suppliers in your industry. The report they produce will provide information on the supplier’s credit history, including any bankruptcies, claims over assets, or County Court Judgments.
- Analyse the report. Look for any potential red flags, including a history of overdue payments, a high level of debt, or a low credit score. Sometimes reports can be complex, so it might be worth asking your Accountant to consider and assess the risk based on the report if not immediately obvious to the reader.
- Consider additional due diligence. This could include checking references, reviewing their financial statements, and verifying their legal and regulatory compliance.
Conducting a credit check can be a complex and time-consuming operation, especially for SMEs where there might not be the internal resource or expertise available to implement one. There are some useful tools/sources available, however.
- Credit reporting agencies, such as Experian and Dun & Bradstreet
- Industry associations and trade groups, which may provide information on suppliers in your specific industry.
- Membership organisations, such as the Institute of Directors and the Federation of Small Businesses which offer access to their databases to members.
However, the quickest and most efficient way is to conduct a thorough credit check to ensure that you are working with financially stable suppliers.
What happens after a credit check?
Assuming the credit check demonstrates that a supplier is financially stable, then it is important to establish/maintain a strong working relationship, by following some of these best practices:
- Develop effective communication channels. This will set the expectations for how and when you will communicate with your supplier.
- Agree payment terms. These will include dates, payment methods, and the penalties for any overdue payments. Clear payment terms will help prevent future payment disputes. It is also worth considering drawing up a contract especially if your company is supplying a new business.
- Monitor the supplier’s performance. This could include keeping a record of delivery times, product quality, and the level customer service. A negative change in any of these could indicate a problem.
All these best practices will help build a strong working relationship with your supplier and help ensure that your business is protected against any potential risks from that supplier.
What about insurance for further protection?
Conducting a credit check and establishing strong working relationships with your suppliers will certainly help to protect your business from financially troubled suppliers. However, if further protection is needed, then there are some insurance options to further mitigate any potential risks that are worth considering, including:
- Trade credit insurance. This type of insurance is used to protect against non-payment by a supplier and will pay out if a supplier defaults on a payment.
- Product liability insurance. Product liability insurance can provide coverage for legal fees, settlements, and judgments. against liability claims related to products sold by your supplier.
- Business interruption insurance. This type of insurance is used to protect businesses against financial losses if a supplier is unable to deliver products due to a natural disaster, theft, or other unexpected event.
As with all forms of insurance, read the small print to be certain exactly what is covered.
Talk to us if you need help with credit checks.
If you are concerned about the financial position of your suppliers and the effect that issues that derive from them could have on your own business, please contact us or call one of our offices. We will be happy to point you in the direction of a credit checking specialist.
Also, K&W Recovery, trading as Antony Batty and Company, Thames Valley:
