Your Guide to Completing a Companies House Search
by Erin Fogarty
Avoiding bad business debt is vital for the survival of your business. If your partners, customers or clients are at risk of insolvency, there can be a knock-on effect for your company too. You may have outstanding contracts or financial obligations that are now impossible to recover.
There are a number of measures you can put in place to protect your business from a variety of threatening situations. Here are four of the best ways to avoid bad business debt for you to implement.
1) Be selective who you trade with
One of the most crucial ways of protecting yourself against severe business debt is being selective on who you trade with. Taking anyone on as a customer despite bad finances can have a detrimental impact on your cash flow, due to lack of payments. Depending on the size of your business, this could lead to insolvency.
Using a credit referencing agency (CRA) to get a credit score of potential clients will give you a good insight into the financial health of the business you’re dealing with. Any signs such as CCJs can show that a business already has bad financial health, or is sensitive to changes e.g., rising interest rates could be enough to knock a company with tight operating margins into insolvency. You want to avoid dealing with these businesses as it can have a ripple effect onto your financial health. It’s always better to protect yourself and identify issues before they become too much of a risk.
AML and IDV checks
AML and IDV checks could also help your business gain a deeper look into how a business is operated. For example, looking into a company director’s history could show if they’ve been involved with previous companies that have become insolvent. This is a potential warning sign to monitor the business closely, even if they’re otherwise financially healthy. Although not certain, it’s possible that the current business will follow the trend of insolvency due to poor management.
Part of these checks includes looking for adverse media. This is useful to find out public opinion of a company, as well as any news articles or blog posts suspecting a company of criminal activity. This will help your business maintain a favourable reputation and avoid risk if any of the suspicions turn out to be true.
It’s always advisable to monitor not only prospective clients, but also existing customers, partners, and suppliers. This is because a business could start failing no matter their size. This could be enough to push your company into insolvency or at least have a impact on your finances.
Due to ongoing global supply chain issues, suppliers especially are recommended to watch and make contingency plans if one fails. This is because for some businesses, even on day of non-operation can be enough to put a company in bad debt.
2) Review your payment terms
Payment terms outline how and when your customers or clients need to pay your business; this could be repayment for a loan or payment for services. These terms are essentially an agreement that sets financial expectation, including when the payment needs to be made and what the penalties for missing a payment are. Transparent payment terms could benefit your business greatly as they make the process a lot easier for you customer to understand the billing process, reducing confusion and ensuring you get paid.
Payment terms affect a variety of areas including:
- Cash flow
- Profitability
- Sales growth
- Credit
- Supply risk
Negotiating better payment terms can help both lenders and borrowers as it means you evolve from being a cost-saving function to being a cash flow-generating function. Getting paid on time is vital for business success. If you don’t define the right terms regarding payment and get both parties to agree, you increase the likelihood of late payments, poor cash flow and unhealthy finances.
Having clearly defined payment terms will improve cash flow forecasts and make it easier to take on new projects and invest in new opportunities. This way you can keep more capital in your business, improve liquidity, make your own payments, and avoid becoming overdrawn. All round, better cash flow improves your credit rating and reduces risk.
3) Credit check before deals
One of the best ways to identify and mitigate risk is credit checking a company before dealing with them. Using a CRA to gain access to a business credit report will provide you with details such as:
- Ownership information
- Subsidiary companies
- Financial information
- Risk scores
- Liabilities/insolvencies
- A credit scores.
- General information about the business (e.g., address)
- Payment score
- Credit event history
- Directors and filing information.
An international or UK Credit check allows you to deduce whether the prospect or future supplier or partner is financially healthy and reliable. Without information into their past payment behaviour and projected financial stability, you expose your business to substantial risk.
It’s extremely helpful when vetting a new customer, or checking on existing ones to run a full credit check, as it allows you to spot issues early. You can prepare for potential problems which could negatively impact your business and ability to pay your own creditors on time. Credit checking is vital to maintaining a positive cash flow, keeping your supply chain moving, and setting reasonable payment timeframes.
4) Monitoring
Monitoring is essential for avoiding bad debt as it helps mitigate risks both internally and externally. It ensures everything is running smoothly within your business and quickly fix any issues spotted as well as protect your business if any partners start showing red flags.
Two main benefits of monitoring are:
- Early warning issues or problems can be spotted before they become serious, expensive, or irreversible.
- Organisations can adjust accordingly when monitoring shows that current approaches are not working, and partners can respond effectively to any changes.
Monitoring processes allow you a deep insight into business you work with as you can observe activities throughout all departments. This will help departments communicate about business processes more effectively. Red Flag Alert provide notifications so you know instantly if there are any changes to your monitored financial records.
Keeping a close eye on your own business can also avoid internal risk such as poor admin processes which could lead to insolvency due to incompetence. Monitoring allows results, processes, and experiences to be documented and can be used to make informed business decisions internally and externally. For example, if you were planning on acquiring a business, you could compare their target and actual growth to help with your decision.
Having comprehensive and reliable business data means you can routinely check and report any issues found before they have a chance to escalate. This also makes your business look trustworthy when shown to potential investors.
How Red Flag Alert can help you mitigate risks and avoid bad business debt
Red Flag Alert provides you with access to a multitude of tools and data to protect against bad debt and encourage business growth. With over 100,000 updates to our platform every day, you can be assured our data is the most relevant and up to date, through our monitoring alerts you can be notified the moment a partners finical health changes, allowing you ample time to make adjustments.
Key features include:
- Access to our system’s industry-leading financial health ratings for over 15 million businesses
- Over 100,000 updates per day and 50 new companies per month
- The ability to monitor the financial health of new and existing customers
- A more complete picture of financial health than any standard credit reports
- The ability to download credit reports in a variety of formats
- The ability to filter sales prospects by credit status, making it easier to find customers in good financial shape
- Instant access through your CRM using our API.
Red Flag Alert is the UK's most comprehensive credit management tool. To discover how your business could benefit from Red Flag Alert's rich data set to protect and improve your decision making, request a free trial today.
