Why it’s important to know your customer, what that means, and how to protect against the worst outcome

Philip King explains when times get tough knowing exactly who you’re trading with is crucial.

When times get tough, as they are now, the number of failing businesses increases. That’s why knowing exactly who you’re trading with, and protecting yourself against the worst outcome, is so crucial.

However knowing your customer is far more than just having their correct name, though that’s the starting point.

You need to make sure you have the precise name and know the legal status. Is it a limited company, a partnership, or sole trader. If it’s a limited company capture the registered number; that’s the one thing that can never change. For a partnership, get the names and addresses of the partners. This will be vital if you ever have to resort to taking legal action.

Check whether they have the capacity to pay you for the goods or service you’re supplying. If you don’t get paid, and the value of the goods or service you are supplying is £10,000, with a profit margin of 10%, you’ll have to sell another £100,000 to recover the loss, in addition to the materials and labour you might have used, and that’s without considering the opportunity cost of not selling to someone who would pay, and the time you’ve wasted in chasing payment which could have been used on more productive activity. Use a credit reference agency to check out their creditworthiness or log into Nimbla who will give you a high level credit assessment for free.

And as well as knowing your customer, you need to know their customers and suppliers too. What will happen to them if one of their key customers or suppliers goes bust? Will they survive and, if they don’t, that means you won’t get paid.

Just because they can pay, doesn’t mean they will, so never make dangerous assumptions. They might be nice people, they might have impressive cars, but that doesn’t mean they’ll necessarily pay you on time. Talk to other suppliers about their experience, and check if they’re signed up to any Codes committing them to pay suppliers on time. If they’re a large company, check out their statistics on the government’s Payment Practice Reporting portal: https://www.gov.uk/check-when-businesses-pay-invoices. If they don’t pay other suppliers on time, why would they treat you any better? Is there anything in the press or on social media suggesting they might exploit their supply chain?

Don’t just get close at the start of the trading relationship, stay close, so you notice any changes. If their payments to you slow down, that might be a warning sign that they aren’t as creditworthy as they used to be. If they start raising more queries about invoices, that might be a delaying tactic to ease their cashflow. If they seem to be losing orders, or laying off staff, or key employees are leaving, find out what’s going on.

All of these things will help reduce the risk of being unpaid, and increase the likelihood of being paid on time, but there are no guarantees. Businesses can go bust with no warning and the cost of an unpaid debt can be crippling for the supplier who expected payment to be received. One option to consider is insuring your invoices against the possibility that they won’t be paid because the customer doesn’t pay you. Nimbla allows you to insure single or multiple invoices against non-payment in seconds, and it might cost a lot less than you think. Take a look and sleep easier.

Philip King

Philip King

About the author

hilip King is passionate about credit management, the importance of cash flow, and supporting small businesses. In a career spanning over 40 years, he has held senior credit management roles in the high-tech and communication sectors, and in distribution and retail. More recently, he held the role of interim Small Business Commissioner for the UK government between 2020-2021 and, prior to that, was Chief Executive of the Chartered Institute of Credit Management (CICM) for 14 years. These roles involved providing support and advice to small businesses on their trading relationship with customers, particularly in respect of payment issues, and working with businesses of all sizes to improve their payment performance Philip was also the architect of the Prompt Payment Code, and the author of a series of Managing Cashflow Guides, for the Department for Business, Energy and Industrial Strategy (BEIS).


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