Long-time customers can become bad debtors if credit checks are neglected, businesses warned

Bad Debtor

Nearly one in two Australian businesses are leaving themselves vulnerable to bad debt by not performing credit checks on their existing customers, new research shows.

In a survey conducted by Australian credit bureau CreditorWatch, business owners, accountants and credit professionals from small to large-scale businesses were asked questions in relation to their credit management responsibilities.

Whilst 72% of all respondents claimed they always performed credit checks for new customers, almost half (45%) said they never performed routine checks for existing ones.

According to Colin Porter, the founder and managing director of CreditorWatch, reasons for a business failing to perform a credit check on an existing customer might include a false assumption that a one-off check, in the first instance, offers sufficient proof of a customer’s credit worthiness into the future.

“Other reasons include a lack of awareness around credit reporting,” Porter told Dynamic Business. “A business might not be aware, for instance, that performing a credit check on a customer is possible or, if they are, they might be under the impression that they require permission from a customer to access their credit file, which isn’t the case. That’s why education is critical: all you need is a business name or an ABN to perform a check on a customer or prospect through a credit bureau.”

“Whether you are a sole trader or large enterprise credit manager, if you are responsible for managing credit on behalf of a business, you should be performing checks on all customers. Even a long-time customer with whom you have built a good relationship could be subject to court proceedings with other companies. When your customer is a bad debtor to someone else, this is a warning sign that you too are at risk.”

Other key Findings from the CreditorWatch Survey included:

  • The majority of sole trader and micro business respondents cited chasing payment as a frustrating and uncomfortable experience whereas SMEs said it was mostly time consuming. Unsurprisingly, those respondents answering on behalf of large corporates and enterprises claimed it was an easy practice.
  • 86% of respondents felt most comfortable trading with a company from a risk perspective over a sole trader, partnership or trust.

The survey findings coincide with the release of CreditorWatch’s latest quarterly Small Business Risk Review. The analysis of aggregated and trade payment data, sourced from over 50,000 active bureau members, shows that an increasing number of businesses were taken to court over outstanding debt in the second quarter.

Porter noted that the greatest increase of court judgments occurred in Western Australia, where court actions rose 227% in Q2 2017, when compared with Q2 2016. He attributed the increase to the continued winding down of the mining boom, explaining: “When a large mining company starts to downsize their operations, this impacts the finance of their whole supplier ecosystem, from the small business that supplies their office to the local coffee shops and eateries. In turn, this leads to these businesses delaying payments to their suppliers, resulting in a rise in court actions”.

View the Small Business Risk Review Q2 2017 Report.