Every day, people are approached for credit and asked to make a quick decision. For an SME in a competitive industry, turning away business is painful and the temptation to accept an order when there’s no time to check the potential client’s credit rating is huge. However, fraud in business is always present.

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 your goods, 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 www.graydon.co.uk, a commercial credit reference agency. However, she adds, if you know what to look for, disaster can be averted.

‘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,’ Ms Pennington says. ‘But there’s quite a lot you can get from a form that should start the alarm bells ringing.’

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 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. If they say they don’t have an office there, you can stop the problem even starting.

The most common frauds against the industry involve bogus accounts, says Ms Pennington. People buy an existing com-pany 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.

‘Most fraudsters are professional and know the busy periods for Companies House. The problem 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.’

‘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.’

Cheque guarantee

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 Ms Pennington.

She continues: ‘Another thing 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.’

Bouncing cheques

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.’

Another problem is that changes to com-pany 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 Ms Pennington. ‘Directors or shareholders will appear with shareholders with, say, £100,000 of issued share capital, but they also appear as creditors because they own the company money for those shares. They have to declare that they’re not fully paid up.’

According to Ms 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.

&#8220Some online information suppliers who update their databases daily also can provide you with an early warning/monitoring service which could be very useful if you need to keep an eye on some of or your entire customer base. Early warning messages can be faxed or e-mailed to you automatically whenever a critical change occurs.”

Names and faces

‘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 placing of faces.

‘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 traded a day.’

Credit reference

How, then, can a new company, without access to these kinds of records, protect itself? For these people as well as established companies, says Ms Pennington, it is essential to use a credit agency.

She points out, however, that the fact that someone has had a failed company is not an indication that they’re not creditworthy. There were many cases of SME dealerships relying on sole suppliers. A company which takes a hit from the collapse of a supplier isn’t necessarily a tainted business; it is paying the price for having all its eggs in one basket.

Being aware

‘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.’

It doesn’t take a rocket scientist to keep track of your customers, says Ms Pennington, just a bit of effort. And if it prevents you from becoming prey to dodgy customers, it has to be worth it. You need to be well informed to make the right business decisions and set credit limits at an optimal level. You can be over-cautious and therefore limit or lose potential sales or quite the opposite, ie be over-exposed to risk.

Sources of business credit information are everywhere. Relying on CD-ROMs for credit checks can be dangerous. They could appear as a cheap source of information but they go out of date the moment they are printed. It pays off to find a good online supplier of credit information via the Internet. You need to check how often they update the database and credit information as some online information suppliers do it infrequently. Your best bet is to find a supplier of online information that is compiled from a variety of good sources and updated daily.

Some online information suppliers who update their databases daily also can provide you an early warning/monitoring service which could be very useful if you need to keep an eye on some of, or your entire customer base.

Early warning systems

Early warning messages can be faxed or e-mailed to you automatically whenever a critical change occurs on a customer you are monitoring. That can pre-warn you on any potential changes in their financial strength and the ability to pay your invoices.

Credit information and monitoring is also widely used to keep an eye not only on your customers but also your suppliers, competitors and other businesses you are dealing with.

If you are trading outside the UK, whether you are exporting or importing, it is also worthwhile to know the risk of your potential or existing customers or partners abroad.

Credit checks are now available instantly online (via the Internet) on millions of foreign companies. You need to find an online information supplier who has a good international coverage (not many do). Even with the best online suppliers, sometimes you will need to wait more than 24-48 hours for a fresh credit investigation as in some countries companies are not obliged to file detailed information and accounts.

Before trading or opening a new account, think of what you know about your potential customer. The devil is often in the detail. Don’t risk it – check it.