Fake information can threaten your startup.
This blog post has been inspired by the companies I regularly come across online that provide misleading or false information about themselves. For example, I often find company websites that give the impression they are trading as limited companies, when in fact they are dormant companies and operating as sole traders (you can find this out at Companies House). This practice is misleading and I don’t trust companies that misrepresent themselves.
Another situation is when I am checking out the financial health of a potential supplier whose website has impressed me. I often find it has a negative balance sheet, sustained over a number of years. I ask myself – will they go bankrupt in the middle of my project? Will they overcharge me or give me poor service because their debts are greater than their assets? Unless they have some unique products or services that I really need (in which case I will conduct further research on them), I just keep away. Perhaps I am too harsh?
In this blog I investigate how to reduce the risk of doing business with customers or suppliers that might let you down and potentially threaten your business.
Importance of Research
It is really important to do some checks on your potential customers or suppliers, so that you can evaluate the pros, cons and risks of doing business with them. Find out what has been written about them, and read the reviews…or should you?
Fake Reviews
Fake reviews still happen today. The Which? article, ‘How to spot a fake review’ can help you identify them.
Although the larger platforms are making it more difficult, they are most common on:
Cheap electronics and fashion on marketplaces
Supplements, wellness products, and miracle cures
Local services (plumbers, beauty salons, repair shops)
Hospitality and short-term rentals
Customers
Attracting customers and gaining contracts is crucial, but you need to make sure you get paid the agreed amount, on the agreed date. How can you make sure this happens?
Recent research shows approximately 22 % of UK small businesses cite cash flow as their greatest challenge. Among those suffering from late payments, around 34 % have had to rely on overdrafts to keep their operations afloat. The Federation of Small Businesses estimates that around 50,000 SME closures each year are linked to cash flow difficulties.
Recent UK surveys show that late payment remains widespread: 62 % of UK small firms are owed money, averaging £21,400 per company, with over half having invoices more than 30 days overdue. Among those with substantial overdue invoices, 67 % experience cash flow problems. Overall, small UK businesses with fewer than 10 employees were owed approximately £112.2 billion in late payments in Q3 2024.
How to Check Out Potential Customers
1. If your potential customer is a large public company, you can check out their payment practices at the GOV.UK site.
2. If they are an NHS organisation, it’s a good idea to check their payment performance, although most now pay on time.
3. If they are a limited company, check them out at Companies House. For smaller businesses you will only see an abridged balance sheet or micro-entity account but this should tell you whether the company’s assets are greater than their liabilities. If they are, will they have sufficient assets to pay your invoice? You can check out their credit rating , although you will need to pay a fee (this used to be free). If you can’t get a credit report, then this article gives you other ways to check: How (and why) to run a credit check on another business.
4. You can check if they have any County Court Judgements against them here.
There is lot of advice online about on how to minimise your risk including purchasing a credit report (particularly useful if your potential customer is a sole trader), taking bank references, getting supplier references, using a credit checking agency for larger customers, asking for advance payment and reviewing published accounts. An important point here is that if you are not convinced about a company’s creditworthiness, then don’t extend credit to them initially – ask them to make a part or full payment in advance, using a proforma invoice.
If a business is late paying for goods or services, you can claim interest and debt recovery costs. More information about this is available at GOV.UK.
Suppliers and Subcontractors
It is also worth checking the financial robustness of any suppliers on your shortlist before using them, to be sure they won’t go out of business when you need them. This is also applicable to potential subcontractors.
Terms and Conditions
Having your customers agree to your terms and conditions when they place an order can protect your business from uncertainties and misunderstandings. There are a range of terms and conditions for different situations, for example:
· for supply of services to business customers
· for supply of goods to business customers
· for sale of goods to consumers
· for sale of goods to business customers
· for your website
Have a look online, or if your situation is not straightforward, get legal advice on the best wording.
Back to Negative Balance Sheets
In my efforts to understand how to assess the financial health of a company with a negative balance sheet, I have read many articles and accounting forum debates (yawn). I have learnt that there is a limit to what you can ascertain from just a balance sheet, which is all that small limited companies are required to submit to Companies House. A sustained negative balance sheet, however, is a ‘red flag’. Conversely, successful companies have strong balance sheets that typically show proportionately more assets than liabilities and strong owner's equity. So unless I really need to work with this type of company, I will continue to keep away.
Any thoughts on this? Your comments would be welcome.
Best wishes
Viv
Silver Startups