As companies begin to recover after the economic crisis, they need to remain financially sound. To do this they should review the credit risks within their supply chain. An article from Mary Ellen Biery, a Research Specialist from the financial information company Sageworks, looks at this risk and identifies four types of businesses that pose threats to the supply chain if not properly evaluated. Biery recognizes four areas where companies should perform financial due diligence; suppliers, distributors, customers, and their own. The financial stability of suppliers is an issue for all purchasing departments. Companies need to ensure the supply of material and suppliers that have financial issues could become unreliable. Performing credit checks on customers is very necessary in order to ensure that a customer is able to pay for finished goods. A good practice is to run a credit check each time an order is received.
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What company would not do a credit check on their customers? It’s obvious, I would think, but I found out recently that not many companies actually do.
Our company does site visits to all our vendors as well as credit checks. I have seen so many vendors go under in the last three or four years, although the number has slowed down at lot over the last six months.
We had over 20 vendors go bankrupt since 2009 and on a number of occasions that has left us without raw materials for our manufacturing sites. One vendor provided all our ERP support and went bankrupt two months after we performed a check on their financials.
This is a great wake up call for small businesses. Please please please do credit checks on your vendors as well as your customers. Also do a credit check on your own company so you know what other companies see when they run a credit check on your company. It is important to have good credit ratings and a lot of companies seem to miss this.
I worked from a company that went bankrupt and our credit history was impeccable. We failed because one of our customers failed and that was that. It left a lot our customers in a lot of trouble.
Vendors are important to your supply chain and we spend a lot of time getting a lot of documentation from vendors about their financial situation and credit history. Sometimes that does not stop vendors going bust.
We perform due diligence and credit checks on all vendors and credit checks on customers before any items are sent.
You have to perform credit checks on your customers, I agree, but vendors never used to be an issue. Today if I had a company I would perform credit checks on them as if they fail to supply goods, you can’t make goods.
Performing a credit check on a customer is a no-brainer, but I am stunned by the number of small business owners who think that this is not necessary as they have done business with these guys for years, and they trust them, and then they find themselves out for thousands of dollars.
A Credit Check is always a must for sustaining the business. Can anyone throw light on a standard method for carrying out such a check?
Would such a check violate any banking code?