By Max Clarke
Almost half of businesses have lost money in the last 12 months as a result of trading with another company without a signed contract in place or completing adequate due diligence, according to new research commissioned by Creditsafe.
A failure to complete due diligence has seen 7% of UK firms become a victim of fraud, losing monies after being duped into sending goods to a false business address or a company vanishing before paying for goods received. One-in-six firms has provided goods and services in the last 12 months without ensuring a contract is in place or conducting any checks on the customer.
When providing goods or services to new customers, 40% of companies don’t have a written agreement in place, a contract or even email confirmation, to ensure there is a contractual obligation for payment. Less than half run a credit check before entering into an agreement with a new customer, so they may have no idea whether the company is solvent before trading. Almost three quarters of firms don’t check whether the delivery address for goods matches a registered address for that company and 67% of companies don’t even review a company’s website to check they are legitimate.
Companies are also failing to complete regular checks on existing customers to establish whether their circumstances have changed and their ability to pay for goods and services provided has been affected. In the last 12 months, 84% of companies have provided goods and services to existing clients without running a refresh credit check on that enterprise.
David Knowles, Business Development Director at Creditsafe, said: “The pressure placed on companies to deliver goods and services in a restricted timeframe without a signed contract or purchase order can be immense.
“However”, he cautioned, “even if firms do not have time to sign a contract there is no excuse for failing to complete the most basic due diligence exercises to establish whether a customer has the means to pay for the goods or services provided, or to ensure that a transaction is not fraudulent.”
Millions of UK businesses are putting their faith in handshake agreements; with one-in-five companies providing goods and services because they ‘trusted’ the people they were dealing with. A further 20% conducted no checks because they were trading with a big company so were confident they could pay, which given the dramatic collapse of big companies such as ROK, Pontins and Connaught in the last year is a risky strategy. Almost one in ten companies claim they have been pressurised into trading with companies because they felt there wasn’t time for adequate checks and they feared losing the business if they delayed.
When firms do lose money after neglecting due diligence or failing to have a contractual agreement in place, there is a reluctance to chase up monies through legal channels. Just a quarter of firms that lost monies after failing to be paid appropriately after delivering goods or service threatened legal action. The vast majority accepted losing these monies and the passive action taken was to refuse to offer services to the company in the future.