Last year there were 39,085 insolvencies in the UK, averaging on 752 a week which is the highest insolvency number in the past three years. With late payments now becoming a trend in business, cashflow remains a massive problem for most companies. As such, businesses are now becoming much more selective when choosing who to do business with, and rightly so. If you go into business with a company who has a bad payment history and a struggling cashflow, their negative decline will eventually have a rippling effect on to your own company, causing you your own cashflow problems. Our advice is to only go into business with creditworthy companies. If you’re unsure what counts as a creditworthy company, we have put together a top ten check list of the perfect company. It’s rare you will have the ‘perfect’ company to work with, but this check list will bring you pretty close if you can tick of most of the boxes!
- Good payment behaviour. The bottom line of running a business is getting paid. If you don’t get paid your business is unlikely to survive for that long. When going into business with a new supplier/customer, you need to be sure that they will pay you consistently every month and within the terms you set for them. If a company has a bad payment history and it shows no signs of improving, it may be best to stay away from them.
- A solid cashflow. The company you deal with has to have a solid cashflow in order to be able to pay you. If their cashflow starts to become unstable, their payments to you will do the same and that in turn will disrupt your cashflow.
- A good credit score on their credit report. If a company has a good credit score, it’s a very good start. A credit score takes into consideration all of the business’ aspects and rates it on how good each individual aspect is. This then gives a rating for the company as a whole. On a Creditsafe credit report, a rating over 50 is classed as a low risk, so if you want to be very careful on choosing a company, choose one with a credit limit that’s 50 or higher.
- Low amount of debt. Most companies run on credit, meaning they will always be in debt. However there’s debt and then there’s bad debt. It’s important you distinguish between it. Mortgages to start and build the company are common debt for a company to have, however, if they start to ask for bank loan after bank loan and are racking up a considerable amount of debt, it may be worth steering clear of them as it could turn into bad debt. Always ask yourself; if this company became insolvent, how far down the line will my company be to get paid, if at all?
- A stable/increasing profit. An increasing profit isn’t a must, but it’s always nice to have. A stable profit is important when it comes to companies you are dealing with, as it wouldn’t be in your best interest if it was decreasing as it could affect their payments to you. Our company credit reports offer five years account history, so always check how the profit has been progressing over the years and whether it has increased or decreased.
- A solid director. Director information is a very valued section of a credit report. It can show you the directors’ personal details such as birthday, nationality, address and how long they have been appointed to that company. It will also give you information on any other appointments they have at present or in the past. It’s worth checking that they weren’t previous directors to five companies that have all failed for example. On a Creditsafe report, there is a feature called ‘Safe Alerts’. Safe Alerts flash on the screen if the director has been linked to a company that has dissolved in the past.
- No County Court Judgments. A County Court Judgment (CCJ) is when a company has been taken to court over payment disputes. If they pay that judgment within 30 days, it will be taken off their credit report. If they don’t pay it within 30 days, but do eventually pay it, it will come up as satisfied but stay on their report for 6 years. If a company has a few CCJ’s it could mean they have cashflow problems, but always investigate them and question the reasoning behind them if you’re thinking of going into business with that company.
- Below industry average ‘Days Beyond Terms’ (DBT). DBT is how long a company takes to pay their bills over the agreed amount of invoice time. For example, if a company is invoiced for 30 days and they pay in 60, their DBT will be 30 days. On a credit report you will see the company DBT and the industry average DBT. This allows you to compare the two and see if that company is good at paying its bills compared to others in its industry, because realistically if you can get paid sooner by a different company in the industry you’re going to go with them instead of someone who takes longer to pay.
- A good Group Structure. Creditsafe credit reports allow you to look at the Group Structure of a company and distinguish where it stands under the corporate umbrella. It also gives you a chance to forecast the future of a company by checking its relative companies. For example if any of their relative companies are struggling, that company could lose money helping them in the future.
There may not be such a thing as a perfect company, especially as the economy is still recovering from a recession and fraud is at its highest record in history, not to mention the ever growing trend of late payments. As the majority of B2B businesses and other companies now rely heavily on trade payment and credit to run their business, they rely on people paying them when they say they will. This is why credit checking is so important- you need to be sure that a company has a good track record of paying their bills on time and taking all the legal precautions that they are required to.
Have a free trial of Creditsafe today and see what insights it can give you into companies you are thinking of doing business with!