Most business failures are the result of inexperience or poor management, or reasons beyond the directors’ control. But some end up in receivership because of owners taking too much money out of the company or otherwise displaying what Companies House would define as ‘unfit conduct’. So how do you safeguard your business from companies seemingly come back from the dead?
Thousands of businesses go under each year - some for genuine reasons, but others? Only a tiny fraction of those running defunct businesses are disqualified, allowing the rest to resurface with Lazarus companies. So how do you avoid the all too frequent financial losses associated with working with them? Ian Carrotte, founder of credit investigation company ICSM gives you a steer.
1. How far should you trust a reborn business?
Out of the 17,000 businesses that went under in 2016-17, just 200 of the people running them were prevented from setting up shop again. That sort of ratio does not tally with the widespread tales of cynical trading that I hear from business owners who have been left holding unpaid bills.
Disqualifying (let alone prosecuting) directors is too often seen as a last resort by a system short on resources and which (again, too often in my opinion) seems to regard financial shenanigans as a victimless crime. So, while everyone deserves a second chance, and many highly successful business people have had their failures, don’t take Companies House’s word that every business run by a previously failed director is a solid bet…
2. Check out the basics
When any company approaches you for goods or services on credit terms, regardless of how long they have been trading, do not shortcut the obvious first step - get them to fill out a credit application form.
This should, as a matter of course, include the following fields:
- The proprietor’s name/s (partnerships and sole traders)
- Their date/s of birth/s (partnerships and sole traders))
- Correct name of the business entity and
- The principal place of the business activity
- Type of company
- Contact name
- MD or proprietor (title)
- Bank details
3. Drill down
Critically, ask for the full names and addresses of all partners in a non-limited business or of the sole trader - this is what will help you identify who you are really dealing with. Failed company owners will often hide behind a family member. Partnerships and sole traders should provide home addresses of all principals in the firm, because they are personally jointly and severally liable for any indebtedness incurred by the firm.
There will be separate entries in the Companies House register for an individual who has held any directorships as well as trading addresses, so check these out too. You’d be surprised how many people just keep trading from the same address but under a different name.
4. Look for anomalies…
If you spot a name or address through Companies House that is very similar to the one you’ve been given, check that out too. Again, dishonest people will reorder their first names to throw you off the scent, or slightly change their date of birth. A quick Google on a person’s name and their town or city can also pay dividends - putting the key search terms in inverted commas will narrow the results.
5. Who pays the bills?
Critically, confirm that the entity you will be invoicing is the entity responsible for paying you. Don’t be fooled into looking at the holding company (loadsamoney) but invoicing the subsidiary with a similar name (not loadsamoney). They are separate entities. The entity liable to you is the entity you will be invoicing. Of course, it is useful to know the corporate structure of your customer but ‘useful’ is all - unless you have some kind of written guarantee from a parent or holding company with money.
6. Check their letterhead
Every business has to comply with the Business Names Registry by showing the registered or trading name (if appropriate), the proprietor, or partners or principal directors, on its letter heading, as well as its principal place of business (for the service of any legal documentation).
Limited companies are required to show either their principal place of business and or their registered on their letterhead. If that information is missing, request it as a matter of course. Ask yourself: why would a business not want you to know their name, address and other details?
7. Take references
Our standard credit application template recommends at least two trade references from people who have had at least two years’ experience of trading with them. These do not include firms or companies associated by commonality of family, shareholders or directors. Keep in mind when looking at references that only a fool would provide as a reference someone they don’t pay well.
With a new business, of course, this can pose a bit of a challenge - best to look as closely as possible at the proprietors/directors who will be responsible for the success or failure of the business. Personal references, consumer/electoral searches may be necessary.
The depth and detail of your searches depends upon the level of your potential exposure.
8. Who works from premises like these?
Check the business address supplied - is it the place where people actually work or is it a business centre or accountancy offering a credible sounding address? If the company does have operating premises, are they in keeping with the size and style of the business you’re expecting? A £1m turnover and operating out of a shed on a trading estate do not tend to go together! Remember, you can find out exactly what most buildings look like these days without leaving your desk via Google Maps.
Equally, check out the business’s website - if it has one. Does it look genuine and ‘feel right’?
9. Get the sign off
Ensure that your prospective client has seen and signed off on your terms and conditions so there will be far less room for argument later down the line - unscrupulous businesses will look to find loopholes that provide an excuse not to pay.
In the normal course of a busy day, you won’t necessarily want to negotiate a full set of conditions with each customer - which is where standard terms and conditions come in - and these should include detailed credit terms. If you are dealing with a particularly difficult, lengthy, expensive, and/or complicated job and you may wish to add in special terms, which are more onerous but worth it if you have any doubts about creditworthiness.
10. Dip into the knowledge pool
The great advantage of the credit checking systems we run for several thousand businesses in the print sector is that we keep tabs on the names not just of companies but of disqualified directors too, especially those with a track record of coming back from previous failures. On top of that, our own members regularly give us tips on companies not paying their bills quickly or appearing to struggle. You’d be surprised what crops up!
11. Insist on an upfront payment…
If you’re still in doubt, it is quite normal for new customers to be expected to pay in advance. You might lose the order by playing hardball, but then ask yourself if it was therefore a business you really wanted anyway?
Remember, though, to look again when they ask you for credit terms on a later order or job. It’s not uncommon for fraudsters to ‘set up’ their victims with payments up front for smaller early orders.
The print sector is one that takes a fairly old-fashioned approach - all too often trusting people to be as decent as they are. Sadly, it helps not to be too trustful!