08/09/2014

By Chris Robertson, Managing Director, Creditsafe UK

Last year was a record year for new start-ups in the UK, with 502,000 new organisations registering with Companies House, a rise of almost 9% on the 462,402 new companies established in 2012.

Many of these small businesses will already know the pain and the vicious domino effect that results from late payments. What they may not know is that finance in the form of trade credit is three times larger than bank lending. This means it is not just individual companies that are affected when payments are made late the economy as a whole is impacted; it affects the ability of firms to fund growth and expansion.

Operators of newly formed enterprises and those starting up a business in 2014 should take cash flow management very seriously. Start-ups should ensure they are fully aware of the risks of default or failure that may be associated with any potential customers through completing the necessary due diligence.

Why use Credit reports?

One in five new start-ups fails in the first year of operation. Poor cash flow management is often cited as the number one reason why new ventures go out of business. A major problem for UK businesses is late payments, but using a credit report, businesses can help protect against the threat of bad debt.

Organisations can use credit reports to help make informed business decisions as to who they should be trading with, reducing exposure to risk and protecting their cash flow.

What information is included in a Company Credit Report?

Credit reports provide a complete overview of a company, letting you know if they are who they claim to be, details of the directors, key financial information where it is available and other vital information such as information on adverse court judgements. Credit Reference Agencies take information form a wide number of sources and use this together with other data such as the company’s payment performance history to produce a recommended credit rating. This is used to predict the likelihood of a business becoming insolvent in the next 12 months along with a score showing the company’s payment performance and a credit limit.

How do you use them?

The great news for start-ups is that company credit reports are not just for financial experts. They are now available in an easy to use format and always available on-line. Their use should be encouraged throughout an organisation to help all decision-makers assess whether a prospective customer should be given access to credit or goods and on what terms.

In addition, new innovations allow them to be easily integrated with a company’s accounting or CRM software packages keeping risk front of mind and helping companies make better decisions.

Credit reports should not however be used alone. They should be employed alongside other more traditional research methods to complete a full due diligence of the prospective customer and gaining an old fashioned personal recommendation can be invaluable.

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