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Red Flags to look out for in a company credit report

Nov 09, 2023 Red Flag Alert Updated On: November 9, 2023
Red Flags to look out for in a company credit report

Why You Need to Perform Company Credit Checks

Running company credit checks can help you verify whether a client, supplier, or prospect is operating their business credibly and legally. This information is crucial to making informed business decisions and minimising potential threats that could negatively impact your business. Accurate, up-to-date credit checks can help you to:

Identify untrustworthy or fraudulent businesses

Fraud is the most common criminal offense in the UK, accounting for 41% of all crimes. It is crucial to ensure that the businesses you deal with are reliable to avoid costly legal or financial problems in the future. You can reduce the risk of becoming a victim or unknowingly participating in fraudulent activities by thoroughly researching the reputation of any businesses you plan to work with.

Protect your business from late or missed payments

A company credit report can give you a better understanding of a business’s financial history. A poor credit report and county court judgement (CCJ) cases may indicate that a business has been unreliable with or is experiencing financial troubles. These warning signs should be taken seriously because they can negatively impact your cash flow. If a client or supplier goes bankrupt and is unable to pay your invoice, there is considerable risk that you might not get that money back.

Build stable business relationships

If a client or supplier is facing financial problems, they may stop working with you to cut costs, causing the relationship you worked so hard to build to collapse. This can lead to a situation where you'll need to invest more time, effort, and money into new connections, negatively impacting your business growth and creating an unstable and stressful working environment for your employees. Similarly, losing suppliers can set back your ability to deliver goods and services on time, causing lasting damage your customer relationships.

Accelerate business growth

Delayed and unpaid invoices can slow down your business growth rate by reducing the amount of working capital available. When funds aren’t available to be invested in crucial areas like marketing materials, staff, inventory, and other assets, it can delay progress and limit the potential for growth. By carefully selecting clients with a low-risk company credit report, you can reduce the odds of this happening and give your business greater stability.   

Red Flags to look out for in a company credit report

Assessing a client or supplier's credit history can provide you with valuable insights before closing business deals and keep you informed of any financial or administrative changes that may impact your sales and growth. Knowing the red flags to look out for in a company credit report is crucial for making informed decisions for your business.

Unidentifiable or Obscured UBO

What is a UBO?

A UBO, or Ultimate Beneficial Owner, is a person or entity who owns or controls the assets of a business, trust, or property. The UBO of a company may differ from the legal owner but is the individual who ultimately has the most power over the company - typically owning 25% or more of shares and/or holding voting rights.

Why is it important to know who the UBO is?

UBO transparency is crucial for governments to enforce Anti-money laundering (AML) policies and prevent illegal activity. When engaging in trade deals with other businesses, you need to take responsibility for checking who the UBO is to keep your business secure. Criminals are known to obscure their identities through fictional names or addresses, complex corporate structures, or illicit shell companies. Sometimes, there are legitimate reasons for a beneficiary’s identity to be concealed, such as privacy concerns.

Red Flag Alert’s credit report tools make identifying who you’re doing business with more straightforward than ever. You can run UBO checks with worldwide coverage to reduce the risks posed to your business by bad actors.

Businesses with a history of CCJs

A County Court Judgement (CCJ) is a formal court decision that a debtor owes a creditor money and has failed to pay it by the date it was due. If a company has been issued with a CCJ, it may be a sign that they are experiencing financial difficulties.

Working with businesses with a history of CCJs can present risks such as delayed or incomplete payments, which can impede cash flow and result in wasted time and money chasing invoices. It is necessary to carefully review the risks before entering or continuing any trade deals with such businesses. You should consider the date when the CCJ was raised, the amount of money involved, and whether it was eventually satisfied.

You may also want to find out the reason why the CCJ was raised. In some cases, the issuance of a CCJ may be more complex than a past due debt; for example, if there was a disagreement between the debtor and the creditor about the charges and this is why the debtor hasn't paid.

Precautions to take when working with businesses with CCJs

You should be highly vigilant when working with clients with CCJ cases and take the appropriate measures to minimise financial risks. You could ask for advance payments, deposits, shorter payment terms, or progress payments to better ensure you are fairly compensated for goods and services. For high-risk clients, you might even choose to terminate business altogether.

 It’s also beneficial to be observant of any changes that occur within existing business relationships. If a supplier or client’s payment times are starting to slip, or they are requesting to rework a proposed timeline, this might be indicative of cashflow problems, and a credit check may be appropriate.

With Red Flag Alert’s real-time monitoring tools, you can stay informed on financial risks associated with new and existing clients. We cover over 6.5 million businesses in the UK, giving you the data you need to make strategic, evidence-based decisions for your company and help prevent losses before they happen.

Politically Exposed Persons (PEPS)

Company credit report checks should include identifying whether your client is a Politically Exposed Persons (PEPS), because they can present unique risks that require additional attention and due diligence. PEPS are individuals who hold prominent positions in society with formal influence or power over constituents, laws, government policies or assets, and more.

PEPS are considered high risk because their authoritative positions offer more potential opportunities to receive bribes and be involved in money laundering schemes or other illegal activities. You need to be aware of when you are working with a PEP, so you can ensure take the necessary steps to mitigate the risks of being involved in any unlawful or dishonest activity.

Businesses held or operated in High-Risk Third World Countries

There are unique risks that you’ll need to consider when working with non-domestic businesses. Companies located in countries with deficient anti-money laundering regulations or terrorism financing risks require additional due diligence checks. The UK's Money Laundering Regulations (MLRs) mandate enhanced and ongoing checks when interacting with businesses established in High-risk Third Countries, such as Source of Wealth investigations, Beneficial ownership checks, and additional background checks.

How can I protect my business from bad actors?

Identifying and avoiding risks before they occur is the best way to protect your business. With Red Flag Alert’s KYC and AML tools, you can run PEP, UBO, and CCJ checks in seconds. We provide current and detailed company financial health data to help you make informed decisions for your business based on your risk tolerance. Start your free trial today and quickly run detailed financial health checks on clients and suppliers with our Company Credit Check tool. 

Published by Red Flag Alert November 9, 2023

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