By John Davis. Managing Director, Business Centric Services Group (BCSG)

Knowing who you are doing business with and how likely they are to be able to pay you for goods and services is essential for success. At this time of uncertainty it’s more vital than ever.

Understanding how to manage your credit effectively might make the difference between survival and failure.

It seems however that managing trade credit is underestimated amongst small businesses. There is still a lack of clarity about how trade credit works, how to manage it, and how to make it work for you.

As a business owner, you may well be focused on chasing new business and creating new opportunities, and credit management may not be at the forefront of your attention.

Hopefully these statistics may grab your attention:

40% of small and medium size businesses have late payment problems and spend on average 2 weeks a year chasing late payments.

The Credit Management Research Centre (CMRC) at Leeds University Business School reported that the average SME has to write off £14,000 of bad debts every year; that figure may be getting worse during this unstable economic climate.

More than 4,000 businesses have needlessly gone bust since 2008 due to late payments.

Bad debts may be lying in your books and causing a threat to your small business.

OK, so we’ve got your attention, now we need to think about how to manage credit effectively. As a director of a small business there couldn’t be a better time to take a critical look at credit management and increase awareness of the benefits of credit checking.

Conducting a high quality company credit search is a necessity for many companies. Credit checks allow you to find information about financial positions and potential risks of your customers and suppliers.

A detailed company credit search usually provides information about business background and its credit history. It allows business owners to find out important details about operations and payment patterns of their potential customers. It is essential for owners to pay attention to credit history and find out whether customers pay their debts promptly and on time. Otherwise, small businesses may experience difficulties with collecting payments and allocating debts.

This information can be easily obtained online which allows owners to spot potential risks quickly before they turn into big problems. Such credit check information is vital for owners to arrange proper contract terms for new business, avoid surprises from current customers and minimise the risk of bad debt.

There are many other resources available to small business owners to obtain financial information about customers and suppliers:

Check a limited company’s accounts at Companies House.

Search the Register of Judgments Orders and Fines — held at Registry Trust Ltd.

Check with the Insolvency Service.

Check that bank references are genuine.

If possible, check your customer’s payment record with some of their other suppliers.

The Business Centric Services Group (BCSG) carried out a survey amongst its small business customers and according to the respondents the most popular methods of credit checking are visiting their customer’s website and checking company accounts.

Of the respondents who did credit check their clients, either via company accounts or credit reports, 51% found the information fairly useful and only 37% very useful. This figure seems quite low which may be partly because only 20% of BCSG survey respondents provide credit reference agencies with payment information to protect themselves and other small business owners.

In today’s turbulent economy small businesses need to pay more attention to their customers and suppliers trading history, therefore a quick look at the last annual accounts may not be sufficient to gain an up to date picture of a company’s financial performance. It’s good practice to regularly monitor financial performance and other information to establish the credit worthiness of a company and also provide valuable information to credit checking agencies to obtain more accurate information.

Do not become one of the statistics above. If you don’t already, we urge you to allocate some time to ensure your credit management procedures are in place and up to date.

This information really could make the difference between success and failure.

Business Centric Services Group

BCSG create and distribute value adding products and services to over 120,000 small businesses through financial institutions. BCSG products provide real, tangible solutions for small businesses to survive and succeed while simultaneously providing financial institutions with the opportunities to differentiate their proposition, enhance customer loyalty and grow wallet share.

Before joining BCSG, John Davis served as the Marketing Director of Barclays Bank as well as the Managing Director of Clearlybusiness, the Barclays SME Innovation team. During his tenure at Clearlybusiness it was named Deloitte fast 500, a ranking of the fastest growing technology companies in Europe, the Middle East and Africa.