A guide to using credit checks to check on suppliers

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Introduction

Background Checks for the consumer

Whether you're buying a car, paying for a wedding or refurbishing your home, you'll want the reassurance of knowing that you're dealing with someone reputable. But checking out reviews from satisfied customers isn't enough if the business is having financial problems.

Although a company may seem outwardly successful, it's not difficult to disguise what's really going on. Be it a Director with a dubious track record of financial irregularities, the business is teetering on the brink of collapse, or even one with an outstanding track record. It's essential you have all the facts.

The Checkaco website has been developed to give the ordinary person access to, a fast affordable company credit check service. It's easy to check a company to find out what's really going on. A business credit check helps ensure that you're handing over your hard-earned money to someone you can trust to deliver what they promise.

Simple Peace of Mind

CHECKACO.COM offers everyone the ability to carry out a business credit check, an easy way to get peace of mind. For less than the price of a pint of beer, you can get a full company credit report containing vital information that will allow you to see whether there are any warning signs.

A business which is piling up debts has a poor credit rating or discrepancies over the name and address of the registered office could all be signs that things aren't what they seem. If a company is about to go bust, you'll lose any cash you've paid to them, leaving you out of pocket. A Business credit report will alert you to any issues that are looming and prevent you from losing out before paying.

Don't pay without a Credit Check

There are many circumstances where you might want to check a company, and Checkaco provides the hassle-free way to do this. Perhaps you're a consumer making a purchase, or maybe you're a self-employed person who is about to offer their services to the company; whatever your situation, checking the company out first could save a lot of heartache in the long term.

The credit report you'll receive with Checkaco is comprehensive and detailed, allowing you to make an informed decision about whether the business is acting honestly. There are so many tales of woe where small businesses have disappeared with the money or gone bust without delivering what was paid for, that it's simply not worth taking the risk.

If you're not familiar with Credit Reports and ratings, the easy-to-use guide provides plenty of assistance throughout the document. Simply click on the hyperlinks to get more guidance on any particular element of the report.

Reassure yourself first

Checking a companies credit report can be invaluable but you should of course always make sure that you verify their identity too. Check their business card or letterhead for a full trading name and address. They have to provide it. It's the law! Never hand over any cash without independently verifying and checking a business first.

By taking the basic steps to carry out the basic checks and then ordering a Checkaco report for £3.85 you can be satisfied you're doing everything possible to protect yourself against the threat of rogue traders. Don't get scammed.

The whole process is quick simple, and more importantly; completely anonymous. The business will never know that you've checked them out.

Look out for our little advisory "" marks, which when clicked open out into a simple explanation of the section.

When clicked again, it closes the commentary.

It's also worth keeping a lookout for helpful links throughout the report, such as the one circled above.

Know who you're dealing with Hints & Tips...

A credit check cannot tell you who you are trading with, you need to ask that question for yourself. It just makes sense to ask!

Suppliers can come in all shapes and sizes, ranging from the lady next door who teaches piano, to multi-national organisations like Google or Apple.

It is important that you know who, or what, you are dealing with. There are several kinds of "Trading entity" or business type that you might be about to deal with…

(1) Sole Traders

Sole traders are usually small businesses with few if any employees, working from home, a garage or rented premises. However, a Sole Trader can be quite large and may have retained the Sole Trader-ship status for accounting or other purposes.

Sole Traders (and Partnerships – see below) do not have to register their company details with Companies House or, indeed, anywhere else, although some may do so of choice.

This, in turn, means that there is no legal requirement for the business to file its accounts at Companies House for public (you and me or anyone else) scrutiny.

The proprietor, though, is personally liable for all monies owed by his firm at any time and does not enjoy the protection of a "limited liability company".

(2) Partnerships

Partnerships are run by two or more partners and, again, maybe very small businesses or nationwide enterprises, and all sizes in-between. John Lewis is one example of a large partnership.

Again, this means that there is no legal requirement for the business to file its accounts at Companies House for public scrutiny.

The proprietors/partners though, are personally liable for all monies owed by the firm at any time and do not enjoy the protection of a "Limited liability company"

One important point to remember is that, similar to sole traders, both or all partners are "jointly and severally" liable for the partnership debts, so if one partner does a runner, you can sue the remaining partner(s) for all monies owing to you. They are personally liable for any debts of the business. It helps to know where you can find them though.

(3) Limited Companies

A limited company (LTD) is a business that has been registered to ensure that its owners have limited liability. So, if the company does capsize tomorrow, the owners will not necessarily be personally liable for any of the monies owed by the company.

Limited Companies come in three sizes, creatively called Small, Medium and Large.

Some examples of limited companies include Argos Limited, Jaguar Land Rover Limited and Harrods Limited.

(4) Public Limited Companies

Public Limited Companies (PLC's) are usually the "big boys" of commerce and the most rigorously controlled with regard to accounting practices. However, some small or medium companies may opt for PLC status, not least to give the impression of size.

Some examples of PLC's include Rolls-Royce PLC, Tesco PLC and BP PLC

(5) Limited Liability Partnerships

Limited Liability Partnerships (LLPs) are a sort of mixture of a Partnership and a Limited Company, most common among professional firms such as accountants, solicitors and other service organisations where "production costs" are relatively small, fees are high and the penalties for error are even higher. Some or all of the partners are personally protected by limited liability but any unprotected partner(s) could be held liable for all its debts. Not a good position to be in, so there are rarely any of those.

(6) Companies Limited by Guarantee

These are most usually charitable operations, non-profit-making by design rather than through incompetence! If they are registered with the Charities Commission they are obliged to file accounts with said Commission but otherwise, their filing requirements are basic, as with small limited companies. These companies will be registered at Companies house.

Early indicators of creditworthiness

As is often the case, there are signs to look out for which might indicate how legitimately a company carries out its business.

Every business must comply with the Business Names Registry by showing the registered or Trading Name (if appropriate), the proprietor, or partners or principal directors, on their letter heading, as well as their Principal Place of Business (for the service of any legal documentation).

With limited companies, the principal place of business can be either their registered office or their main business premises. If that information is absent, request it as a matter of course.

Ask yourself: Why would a business not want you to know their name, address and other details? It could be a sign that they don't want you enquiring about their business! Or, of course, they might not be aware of the benefits of company branding!

(NOTE: e-mails and other electronic communications must now comply with Business Names Registry rules as well if they are to be considered as legal documents. Beware of placing orders or other contractual documentation by e-mail without ensuring that the e-mail complies with Business Names Registry requirements. You could end up personally liable for the contract even if you were acting on behalf of a limited company!)

Closer Inspection: Take a look at the supplier's presentation/car/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!)

Now let's look at a guide to Company credit reports.

This guide will explain the difference between the types of trading entity. PLC's Limited Companies, Partnerships etc. and what those differences could mean to your trading relationships with them.

It will help you make sense of the credit information available from this website, allowing you to make informed decisions about potential suppliers who would like you to part with your hard-earned cash as a deposit for goods or services to be provided.

Checking on your supplier

Depending on the type of company you are dealing with, there are reports available which will give you more information about the business.

Limited Companies, LLP's Limited by Guarantee

Depending on the size of the company you want to check up on, credit reports can provide a basic or highly detailed insight into the company – and several stages in between.

Remember: look out for our little advisory symbols, which when clicked open out into a simple explanation of the section, or go to the Glossary of Terms for an explanation of terminology.

All limited companies, including LLPs and companies limited by guarantee, have to file a balance sheet once a year, along with an annual return.

Note: If the accounts are overdue, that usually means bad news and should indicate caution, particularly if you're going to trust this company with your money.

The annual return gives details of directors, share capital and "notifiable actions", such as petitions to wind them up

The balance sheet lists the company's fixed assets such as machinery (things that are not easily sold), its current assets such as sales ledger & stock (things that can be turned into equivalent cash fairly easily) and cash in the bank.

It then shows the company's liabilities, which will include bank overdraft, long and short-term loans and the money owed to suppliers.

The difference between the assets and the liabilities is what the company is worth, sometimes expressed as Shareholders' Funds or Net Worth

Closer inspection: If the report shows figures for the past few years, look for a trend: are the numbers increasing? If so, this is a good sign.

Other useful information includes the share capital. This is the amount of money the shareholder(s) has/have invested in the company. It can be as little as £1.

Normally the share capital is an indicator of the Owner(s) (aka Shareholders) investment in the business and therefore an indicator of their confidence in the business. However, this should not be read as a deciding factor, particularly if the other indicators are positive.

If the report gives a credit history, look at the trends – are they improving or not?

More elaborate reports will show a profit & loss statement in addition to the above. This is very helpful because in itself it tells you if the company is being run well (in profit) or not (making a Loss).

Again it is helpful if you have several years' figures to look at, to see if there are any trends. A one-off loss in a past year could be just a hiccough but a trend of increasing losses is invariably bad news. In such cases look at the latest loss against the company's net worth (total assets less total liabilities) and see how long they could stay in business if the current trend continues. As always, look for trends in the past year's figures and be particularly wary if a string of positive balances is suddenly converted to a negative one.

If the Report shows it, look at directors' income and dividends paid. Sometimes a loss can be due to the shareholders taking out large sums of money from the business, absorbing the profits from the current year and, maybe, some of the profits from previous years.

Working capital is the difference between current assets and current liabilities. If it is a negative figure this means that, as a customer, the company is likely to want to take extended credit and, as a supplier, could explain why they want a significant "upfront" payment from its customers to help bridge that gap.

Company ratios, where shown, simply express the above information as percentages and the most important are the pre-tax margin (i.e. profit margin) and the net. working capital as a percentage of current assets and liabilities. Both these should be positive if the company is healthy

A Full Report will also give details of the director(s) other directorships. This can be worth studying, particularly if you think that a director has been involved in another company that has ceased trading, or the other companies are being used as references.