For different reasons, individuals and small businesses rarely do a thorough background and credit check of their business clients. This creates a large information gap when it comes to knowing exactly who you’re dealing with.
Small Business Coach: Know Your Clients First
Everyday information about a business and even looking up reviews is easy to do. However, this type of information only tells you so much. What about the business’s fundamentals? The fact that it does a decent job serving its customers doesn’t mean it’s a safe financial bet if your money is at risk. To put things in perspective, only about 40% of small businesses are profitable. This means that when you invest in or partner with a small business without knowing all the facts, you could be potentially investing in a business that’s failing.
If you’re a distributor, for example, and are wondering whether or not to extend credit to a company, you really want to know certain things. For example, what is their payment history? Have they been sued, and do they have any judgments against them? Have they ever filed for bankruptcy? You might think that, in our information-rich society, it would be simple and cheap to acquire crucial information about businesses. While it’s certainly true that the information is out there, I’ve found that it can be quite costly for individuals and small businesses to find it.
Finding The Information You Need
You can do a certain amount of basic research easily enough by Googling a business’s name. You can also look at business directories, including specialized directories that deal with certain types of businesses, and see if a particular company is a member in good standing. If you want more thorough information, however, such as a business credit rating, you have to order reports from credit reporting agencies.
The Consequences Of Inadequate Information
The problem for small businesses is that they may be dealing with a number of other businesses. If they have to pay a fee to research each one, this becomes a substantial expense. This situation may encourage businesses to skip this type of research and take their chances, which can have disastrous consequences.
Of course, even financially solvent individuals and businesses pay late, so even the most thorough research won’t completely solve this issue. Some businesses pay late not because they lack cash, but simply because they are unreliable. However, you can assume that choosing your business partners more carefully improve your chances of getting paid on time — if at all.
Tips For Doing Research And Due Diligence
Clearly a gap exists separating what small businesses need to know and the information that’s readily available. Most credit reporting agencies focus their efforts on marketing services related to personal credit. In addition to researching potential business partners, you should also be able to look up your own business’s credit score. Here are some steps you can take to get a clearer idea of who you’re dealing with:
- Check customer reviews. While this isn’t going to give you information about key financial or legal information, it’s still a good place to start as it does provide a general idea about the company’s public reputation. Too many complaints are a red flag.
- Request information such as cash-flow statements and balance sheets from the company. Have your accountant go over this with you. It’s not a good sign if the business is less than forthcoming with this kind of information.
- When applicable, ask for proof of the business’s permits or licenses to operate a business in their location.
- Ask for a list of customers, suppliers and distributors. These are people you can contact to learn more about the business’s track record of reliability.
- Hire a business attorney. This is a costly solution, but recommended if you’re thinking of buying, investing in or partnering with a business.
Call Williams & Kunkel CPA today in Flower Mound at 972-446-1040 to have a chat and find out how you can grow your business.