The dangers of doing business without credit checks

In the world of business and finance, being a trustworthy source is extremely powerful, but you also need to ensure that when you land high-value clients, you never skip your due diligence process. Failing to conduct a business credit check is a risk that you can’t afford to take. 

Here, we’ll explain the importance of running business credit checks when you have a new client, including the dangers of doing business without business credit checks. 

The invisible cost of gut feelings

Some people may rely purely on a gut feeling or a professional judgment based on a website to judge whether or not a new business partner is trustworthy enough and reliable. Unfortunately, however, this is not good enough, and often times, a business will be financially unstable beneath its polished exterior. 

Without a formal business credit check, you won’t know exactly what a company’s financial health status is. Here are all the risks that come with doing business without a business credit check in place. 

Payment delays

One of the most obvious reasons for doing business with a partner without conducting business credit checks is the risk of late payments. This is a major contributing factor to business failure for SMEs, and when you fail to vet a client, you may end up going into business with one that never pays on time. 

As a result of this, your capital will become tied up in unpaid invoices, which will inevitably force you to delay your own financial commitments to other suppliers or use emergency funds to sort this out.  

The only solution to preventing delayed payments from your business partners is by conducting those business credit checks, which may reveal a company’s ‘Days Beyond Terms’ (DBT). This shows you the typical amount of time it takes for them to pay compared to their agreed-upon terms. 

Outright defaults

When you provide goods or services on credit, you’re essentially giving out an interest-free loan. So, if that client goes into insolvency before they pay you back, you’ll become an ‘unsecured creditor’. This means that the chances of recovering your money become very slim. 

By ensuring you have a business credit check in place, you can easily identify red flag entities with high debt-to-income ratios. 

Exposure to fraud and phoenix companies/’pheonixing’

It’s safe to say that not all bad debt is due to poor management and that some of it is intentional. There are also entities that often target businesses that they know don’t look into or conduct the vetting process. They will appear as a new company, accumulate a massive amount of debt and then disappear (phoenix) into a new entity to avoid the debt. 

However, by conducting a thorough business credit check, you’ll be able to verify the legitimacy of the directors and the age of the business to help you spot these types of patterns before you decide to sign a contract. 

The effect of negligence

Unfortunately, the dangers of not doing a thorough business credit check are not limited to your bank balance, but can also cause a chain reaction of operational damage. 

  • Supply chain collapse: if a supplier is known to have a poor credit rating, they are at risk of failing mid-project, leaving you unable to fulfil your end of the bargain towards your own customers. 
  • Reputational harm: not to mention, being linked with a financially unstable partner will tarnish your business reputation and brand’s credibility, too, with banks and investors. 

Protecting your future

So, make it a non-negotiable to protect the future of your business through conducting a business credit check. This should be as standard as a signed contract and will help you set the right terms for your business partnerships and agreements. If you find that a business has a low credit score, here’s how you can go about protecting your business: 

  • Ensure that the business pays upfront, or pays a big enough deposit to mitigate risk
  • Giving the business a shorter payment window, for example, 7 days rather than a whole month. 
  • Ensure that you get personal guarantees from the directors of the business. 

Failing to conduct business credit checks not only harms your cash flow, but it also harms your reputation and the livelihoods of your employees. So, make sure you vet all potential business partners with a thorough business credit check. 

 

If you’re looking to implement a business credit check, be sure to get in touch with Creditserve today! We have the knowledge and expertise to walk you through every step of the process.