Every day, people are approached for credit and asked to make a decision quickly. For an SME in a competitive industry, turning away business is painful and the temptation to accept an order for 200 PCs when there's no time to fulfil the potential client's credit rating is huge.
However, fraud in the industry is on the rise. There are plenty of stories about dodgy directors - cowboys who make a living from bogus companies, filing phantom accounts that make the business appear to have been trading successfully for some time. Yet as soon you've dispatched those 200 PCs, that's it. If the customer doesn't pay up, it's your problem. So it's worth being sure that any potential client has the resources - and the intent - to pay for the order.
"Absolutely anything you can imagine people will do, they'll do," warns Debra Pennington, general manager of Graydon UK, a commercial credit reference agency. However, she adds, if you know what to look for, disaster can easily be averted before it strikes.
"The first time someone is contacted on a trade basis is via a credit application form, either through cold calling or working from a marketing list," Pennington says. "But there's quite a lot you can get from a form that should start the alarm bells ringing," she says.
Addressing the problem
For a start, she says, businesses should be wary if the delivery address provided is either a freight forwarding company or somewhere significantly different from the accounting address.
"In some instances, you find the business has been hijacked. Someone is illegally using a reputable, credit-worthy company as the accounting address but diverting deliveries to another address.
"The best way to check up is to confirm the accounting details with the accounting address. It just requires a normal courtesy call. You phone up, say you're setting up an account with the company and will be delivering to that address. At which point, if they say, we don't have an office there, you can stop the problem even starting.
"In the event you do deliver to that address, you've had it. Your own procedures will have failed you."
The most common frauds against the industry involve bogus accounts, says Pennington. People buy an existing company and quickly file reports that look as though the new venture has been trading for a year or even longer. The incidence is high - about three times a month. However, it's fairly easily spotted.
"At this time of year, anyone who's filed accounts for July, August and September needs close scrutiny. Most fraudsters are professional and know the busy periods. The problem here is that there's no audit at Companies House - it takes it all on trust. That puts the onus of responsibility for caution on people who are selling - the people writing a credit line at the end of a busy period.
"Filing bogus accounts has been done before, but this year they've been getting accounts in quick," she warns. "Filing bogus accounts is intention to commit a theft - to obtain goods without paying for them. Nothing happens to these people until they don't pay for the goods. But unless it's spotted early on, they have about three months to get as much as possible on credit and then do a runner."
One simple way companies can establish the legitimacy of a business is to phone the landlord of the potential client's premises. If the company has paid for three months in cash, you can be fairly certain it's trying to rip you off, says Pennington.
She continues: "Another thing we advise our clients to do when under pressure to open a credit account is to trade with the customer for a short period in cash. The main reason is that you get to see cheques and can gauge how long the company has been in existence by the cheque number.
"A cheque also has handwriting on it. People who are trying to defraud suppliers will always have a problem with this approach. They say they'll pay in cheques, then alter the slip they submit to the bank."
Similarly, she says, companies should be careful about allowing goods out against cheques. "If a cheque bounces, you're hit with a double whammy - not just the amount you wrote the line of credit for, but the amount on the cheque too."
Anything to declare?
Another problem is that changes to company laws have made it easier for people using Companies House as a conduit to obtain credit. Credit controllers, when deciding how much credit to extend to a customer, have traditionally assessed the amount someone has put into a business by looking at issued share capital. However, it is now possible to express in accounts an amount of issued share capital that has not actually been paid for. It will appear twice in the accounts, but augment the apparent worth of the business.
It's difficult to spot, but it can be done. "You have to look closely at what the accounts are telling you," says Pennington. "Directors or shareholders will appear as shareholders with, say, £100,000 of issued share capital, but they also appear as creditors because they owe the company money for those shares. They have to declare that they're not fully paid up."
According to Pennington, one of the best ways to safeguard against bogus traders is to keep a well-maintained database of everyone in your own housekeeping arrangement, so you can search against it easily.
"You need to recognise addresses where you've had a problem historically and, if possible, even telephone numbers, so you can see if they've been used previously. People who are setting up repeat businesses will generally try to keep their own train of customers, so they won't be changing too many details of their own."
It's important to be aware, however, that people will go to all sorts of lengths to cover their tracks, and sometimes a bit more digging is beneficial.
"Even if you knew the name of a director with a history of failed companies, if he or she were to set up a company and put any old name on the documents, there's no way you could know they were behind it. The only thing you could do is visit the site and see if you make a connection through the place or faces. You might realise, for instance, that it's the same sales team that used to work for X company.
"The people who do this aren't stupid. They know the system, know how to make a company look busy and interesting, and move the registered office around. They are capable of making any credit report look very busy when they haven't even traded a day."
How, then, can a new company, without access to these kind of records, protect itself? For these people, as well as established companies, says Pennington, it is essential to use a credit agency. Graydon, for instance, has three staff dedicated to verifying the trading details of companies.
"We run a velocity analysis, a simple tool that looks daily at how many inquiries are made into a particular subject on our database. If, all of a sudden, a load of inquiries are made against a subject that hasn't had any activity on it before, we'll look at it very closely," she says.
She points out, however, that the fact that someone has had a failed company is not an indication that they're not credit-worthy. She cites the cases of SME dealerships relying on sole suppliers. A company which takes a hit from the collapse of a supplier such as CHS Electronics or Metrologie isn't necessarily a tainted business; it is paying the price for having all its eggs in one basket.
"It's dangerous to rely on a single source. If you're dealing with a sole supplier, you do need to be aware of what's happening to it globally. Checks on CHS, for instance, would have shown warning signs. When it lost the Intel contract, that quickly became public knowledge. And anyone tracking the company in the US would have seen there was a problem in Europe.
"Some of the smaller dealers who were relying on CHS as a sole supplier are stuffed. They have to find someone, and because they have to, it puts them at the mercy of the people they go to."
It doesn't take a rocket scientist to keep track of your customers, says Pennington, just a bit of effort. And if it prevents you from becoming prey to dodgy customers, it has to be worth it.
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