Any kind of business transaction comes with risk, whether you are searching for investment, looking for partners, or qualifying leads. Risk analysis is critical particularly if there are large sums of money involved. Carrying out background checks on those involved is therefore an important aspect of protecting your business, no matter what industry you are in. Failing to look at customer and partner financial data can end up costing you big time. Just look at the example of Hewlett-Packard. After failing to complete adequate due diligence before acquiring Autonomy in 2012, they ended up with losses of around $5 billion. They were subsequently sued by its shareholders for missing crucial red flags.
Clearly this example is on a much larger scale than most, but the underlying lesson remains the same. By screening businesses and/or individuals before committing to deals, you can save your company a whole lot of money and humiliation. The best way to do so? Look at their financial data.
What Kind of Financial Data is Involved?
In order to get a complete overview of the potential buyer, business partner or investor, you’ll want to determine if they are actually who they say they are. You can check whether or not they can afford the proposed deal or purchase. And you can determine how quickly they are likely to make payment. This information can be concluded using the following factors:
This includes the trading names and addresses of the company, as well as information about how it is structured and who its directors are. It’s also a good idea to look at previous trading names in order to see if there are any red flags associated with them.
In order to assess any potential risks, you’ll want to know if there are any unfavourable records connected to the company. This could include things like bankruptcies, judgments and liens, and should be looked into very carefully.
You won’t have a thorough image of an organisation until you know more about those associated with it. So taking the time to research shareholders, and what their goals and interests might be, is very important.
A usually very reliable way to gain insight into a company’s financial data is to take an in-depth look at their credit score. A number of factors will be taken into account when calculating the score, such as:
- Credit applications – Numerous applications over a short period of time could signify that there are problems afoot.
- Credit Usage – If the company’s credit is constantly maxed out it’s clearly not a good sign. There could be financial issues or they are simply not very financially responsible.
- Payment history – Does the company have a track record of paying late?
- Outstanding debts – How willing would you be to work with a company that already owes money to other businesses/lenders?
How to Use This Information
Once you have access to a company’s financial metrics, you can use it in several ways in order to assess the risks that they might pose to your business. This might include:
Can they afford your product/service?
Qualifying leads by performing financial checks beforehand can save a lot of your company’s resources. For example, look closely at their revenue and stability. If they can’t afford to purchase from you, your team will be able to focus instead on targeting those who can.
Setting credit limits
Once you have a company’s financial data and credit score at hand, you’ll be able to make a less risky decision when it comes to how much business credit to extend to them. Some risk platforms, such as that offered by Global Database, will even provide a suggested limit based on complex algorithms.
Protection from fraud
Of course we’d all like to assume that potential business associates or clients are who they say they are. But the truth is that unless you perform detailed background checks there’s no way to know for sure. Undertaking these checks ensures that your company doesn’t end up dealing with anyone involved in fraud, identity theft, or inflated financial figures.
Are they sustainable?
If you’re thinking about entering into a long-term contract with another business, it is imperative that you have a good idea of how stable their future is looking. With this in mind it’s a good idea to remember to check their file regularly. Changes can happen very quickly. It’s important to know where they stand in order to be able to predict any potential troubles.
How quickly will they pay?
According to recent figures released by Bacs Payment Schemes, SMEs are currently owed an eye-watering total of £14 billion by customers. This can undoubtedly be disastrous for many companies. In fact, as the chart from ASIC below shows, not having enough cash flow is one of the main reasons small businesses fail. Therefore, it is extremely advantageous for companies to look at the payment history of new prospects in order to ascertain if they are likely to cause problems when it comes time to pay up.
Global Database – The Trusted Credit Risk Platform
Carrying out financial background checks on potential customers and business partners saves you time by weeding out unqualified leads. It also protects your business from harmful deals and possible debts. If you’re looking for a simple one-stop solution to safeguard your company and its reputation, Global Database has the answer with its financial data solutions.
Our credit risk platform uses a unique methodology to calculate accurate credit scores and suggest realistic credit limits. Users receive notifications if a company’s score changes. They can also easily access vital background information such as company profiles, shareholder information, and payment disputes. Companies can be filtered by sales turnover to ensure relevant prospects. And all of our records come with direct contact details so you can reach decision makers right away.
Learn more and request a free demo on our website.