This blog post has been inspired by the companies I regularly come across online that provide misleading or false information about themselves. For example, I often find company websites that give the impression they are trading as limited companies, when in fact they are dormant companies and operating as sole traders (you can find this out at Companies House). This practice is misleading and I don’t trust companies that misrepresent themselves.

Another situation is when I am checking out the financial health of a potential supplier whose website has impressed me. I often find it has a negative balance sheet, sustained over a number of years.  I ask myself – will they go bankrupt in the middle of my project? Will they overcharge me or give me poor service because their debts are greater than their assets? Unless they have some unique products or services that I really need (in which case I will conduct further research on them), I just keep away. Perhaps I am too harsh?

In this blog I investigate how to reduce the risk of doing business with customers or suppliers that might let you down and potentially threaten your business.

Importance of Research

It is really important to do some checks on your potential customers or suppliers, so that you can evaluate the pros, cons and risks of doing business with them. Find out what has been written about them, and read the reviews…or should you?

Fake Reviews

A fake review is a positive, neutral or negative review that isn’t a person’s honest and impartial opinion, or doesn’t reflect their genuine experience of a product, service or business. Companies might have paid people to write the reviews, or they may have offered an item free of charge in exchange for a review. The Which? articles, ‘The facts about fake reviews ‘and ‘How to spot a fake review’ can help you identify them.

This article by Forbes, ‘You Just Got Attacked By Fake 1-Star Reviews. Now What?’ provides some advice on how to respond to fake reviews against your company.

Customers

Attracting customers and gaining contracts is crucial, but you need to make sure you get paid the agreed amount, on the agreed date. How can you make sure this happens?

According to the National Federation of Self Employed & Small Businesses, “Our research shows 37% small businesses have run into cash flow difficulties, 30% have been forced to use an overdraft and 20% cite a slowdown in profit growth. If all payments were made on time 50,000 more businesses could be kept open each year, whilst the UK economy would receive a £2.5 billion boost.”

Will you need to send an invoice to the EU or USA? “Research, based on a study of 80,904 invoices by business finance company MarketInvoice, found that 73% of invoices sent by British businesses to EU firms were paid late - up from 40.4% in 2016. Across the Atlantic, the number of invoices paid late by firms in the US increased from 40.4% in 2016 to 71% in 2017.”

How to Check Out Potential Customers

1.   If your potential customer is a large public company, you can check out their payment practices at the GOV.UK site. The government has been trying to get large companies to sign up to the Prompt Payment Code, nevertheless many large companies are very late payers.

2.   If they are an NHS organisation, be aware that late payment is common. The article ‘The slowest payers in the NHS’ is revealing. The article includes a complete list of every acute trust.

3.   If they are a limited company, check them out at Companies House. For smaller businesses you will only see an abridged balance sheet or micro-entity account but this should tell you whether the company’s assets are greater than their liabilities. If they are, will they have sufficient assets to pay your invoice?  You can check out their credit rating , although you will need to pay a fee (this used to be free). If you can’t get a credit report, then this article gives you other ways to check: How (and why) to run a credit check on another business.

4.   You can check if they have any County Court Judgements against them here.

There is a very useful article from Startups website with advice on how to minimise your risk including purchasing a credit report (particularly useful if your potential customer is a sole trader), taking bank references, getting supplier references, using a credit checking agency for larger customers, asking for advance payment and reviewing published accounts. An important point here is that if you are not convinced about a company’s creditworthiness, then don’t extend credit to them initially – ask them to make a part or full payment in advance, using a proforma invoice.

If a business is late paying for goods or services, you can claim interest and debt recovery costs. More information about this is available at GOV.UK.

Suppliers and Subcontractors

It is also worth checking the financial robustness of any suppliers on your shortlist before using them, to be sure they won’t go out of business when you need them. This is also applicable to potential subcontractors.

Terms and Conditions

Having your customers agree to your terms and conditions when they place an order can protect your business from uncertainties and misunderstandings. The article ‘Setting out good terms and conditions for your small business’ gives a good overview. There are a range of terms and conditions for different situations, for example:

·         for supply of services to business customers

·         for supply of goods to business customers

·         for sale of goods to consumers

·         for sale of goods to business customers

·         for your website

Have a look online, or if your situation is not straightforward, get legal advice on the best wording.

Back to Negative Balance Sheets

In my efforts to understand how to assess the financial health of a company with a negative balance sheet, I have read many articles and accounting forum debates (yawn). I have learnt that there is a limit to what you can ascertain from just a balance sheet, which is all that small limited companies are required to submit to Companies House. A sustained negative balance sheet, however, is a ‘red flag’. Conversely, successful companies have strong balance sheets that typically show proportionately more assets than liabilities and strong owner's equity. So unless I really need to work with this type of company, I will continue to keep away.

Any thoughts on this? Your comments would be welcome.

Best wishes

Viv

Silver Startups