Why You Need To Know Your Customer

How well do you really know your customers? Not the individual person you speak to about projects, the person who first introduced you to the company or the person who pays your invoices. We mean the legal entity that is your client. Because companies, just like people, can have complicated histories, and the information you have about them can help you make better decisions about how to handle their accounts, and what precautions you might want to put in place to protect yourself. So today’s blog is all about knowing your customer, and why it’s important for your business.

Legal Status

This point is very much from the beginner’s guide to business finance, but you would be amazed at how many businesses don’t know who their customer is. The legal name and status of your customer are critically important not only to things like your annual accounts but to ensure you extend the appropriate credit limits, have the right paperwork and insurances in place and have the right processes to recover unpaid invoices. For example, you might be dealing with a construction firm called ABC Construction. They have their own local address, so you think that is the legal name of the company. But if you dug just a little deeper, you would realise that ABC Construction is actually a franchise of Alphabet Building Co, and so all invoices would need to have this name and address on them.

It’s vitally important that you know the exact name and legal status of all businesses you work with – especially those you’re supplying to. For example, are they a sole trader, a partnership, an LLC or a limited company? Each of these company types will have different people who are ultimately responsible for paying the company liabilities – and it may not always be the same as the trading name of the business. If you want to be sure you can follow up legally in the event of non-payment, knowing who your customer is is essential. Luckily, this can be done through some simple due diligence before you sign them on -so all you need to do is make company background checks a part of your onboarding process for customers.

Credit Limits

Just as you need to know who your customer is if you want to pursue legal action for debt collection, you also need to know about your customer’s financial stability before you extend credit to them. This is a particularly important step in terms of deciding how much credit to extend to any one customer, and it’s what will stop you from ending up out of pocket if they cannot pay their invoices in the future.

There are many places you can source information on the creditworthiness of your clients. The most common and readily available is credit agency reports, but these tend to be historic and don’t give you an accurate, up to date picture of your client’s financial state. So while they can be a useful tool, you need to use your judgement about whether or not your customer is in a good financial position and the amount of credit you’re happy to extend.

It’s also worth examining the reasons they left any competitors of yours to seek a credit agreement with you. In most cases, it will be as simple as not enjoying the service, or needing to change suppliers due to internal business reasons. But occasionally customers will seek lines of credit with multiple companies because they have reached their existing credit limit with one company and have been refused further credit with that company. A few questions is all it takes to ascertain the reason behind the move.

Once your client is on board and buying from you, your job isn’t done. It’s also important that you monitor your client’s financial health regularly. This gives you an early warning system if they are running into money problems so that you can take steps to protect yourself. Watch out for missed payments, excessive queries, unexplained changes in order numbers or non-response to calls or emails.

References

Another key step that a lot of businesses miss is asking for references from their customers before signing contracts. Much like employers interviewing an employee, you have the right to reach out to references and check that the client is who they say they are, and that there is no history of missed payments or absconding from payment obligations. Watch out for any ‘friendly’ references that might come your way, and instead make sure you contact each reference directly and find out as much as you can about their interactions with the customer and their payment history. This information will help you to build a credibility profile for your client so that you can decide whether or not you want to do business with them.

Credit Account Applications

Finally, always ask your customers to complete a credit account application form at the start of the relationship. This will ensure you have all the information you need to make an informed decision about whether to proceed, whether to grant a credit account and what level of credit to offer. Don’t be afraid to ask for all the information you need, and if you’re unhappy about any of the answers supplied, look for the evidence and reassurance you require before going ahead.

This might all seem like a lot to go through, but it’s these key steps that protect your business and your cash flow from risk and ensure you only work with businesses that can pay your invoices. If you don’t have the time to carry out these checks yourself, you don’t know what to look for or if you’re not comfortable doing it, then there are people who can help. At Debtcol we offer a wide range of bus8ness investigation services, including financial health checks, company and director searches, financial health monitoring and forensic accounting, so you can be confident that you’re working with the right people every time. If you would like to know more, just get in touch with the team today.