Lots of freelancers conduct basic due diligence on clients. Usually they’ll search their client on Companies House.
Is it a legit business?
Are accounts filed on time?
This is a good start, but for many their due diligence starts and ends here. There’s lots of useful information that can be gleaned from a credit check report that may indicate whether a client’s history of paying suppliers is positive or negative.
How to build a picture of your client’s financial health
Risk score
We always start with the most basic factor. The risk score.
This number gives you a high-level glimpse into the financial health of a company. It doesn’t provide more context beyond that, but it’s useful for gaining an understanding of whether the company you’re about to work with is in immediate danger of going out of business.
If there’s a risk of insolvency you’ll want to avoid getting into business with them. Alternatively you could have your client pay 100% of your fees prior to the project beginning, eliminating the risk of non-payment from insolvency.
Commentary
The commentary provides an overview of the health of your client. It will point out facts like:
- whether the client has posted a loss
- if they settle supplier invoices over a longer or shorter duration
- whether they have a high amount of cash available
Usually the commentary is a mixture of positive and negative factors. “This company’s latest profit and loss reserve shows a high amount of retained earnings, but their trade creditors show there’s a high amount of outstanding obligations”.
If you’re seeing lots of negative factors you might want to reconsider your payment terms with your client. For example, if you price based on project milestones it could be worth collecting a larger % of your fee upfront.
Financials
The financials go into more detail about the company. If anything newsworthy pops up in the commentary, you can dig into this section to learn more.
Some of the factors to review are:
- Turnover. Has the client had a good year? Usually the report will show 5 years worth of data. If they have a history of poor turnover this could be concerning (if they’re VC-backed then turnover might not be used as an indicator of success)
- Retained profit. A profitable client is likelier to pay you on time
- Cash. It’s a positive to see a client with a healthy pot of cash. If available cash is low are you confident they’ll pay you?
- Bank loans, finance and creditors. It’s important to understand if your client has lots of liabilities. Creditors will have priority for getting paid, and if they’re borrowing lots of money it can imply there are cashflow problems
In isolation each of these factors don’t tell much of a story, but the credit check report helps us form a bigger picture. We can put pieces of the puzzle together to determine if our client is one we want to work with, if we need to adapt our payment terms or decline the project altogether.
Legal filings
This is one of the most important areas to look at because it will show if the client has any CCJ’s against them.
A CCJ is issued against a company that doesn’t pay a freelancer’s invoice. This is publicly available information so make use of it!
Not only will you see how many your client has, but if they do have any it will tell you the date it was filed against them. CCJ’s should act as a red flag, especially if they’ve been issued recently. This could indicate cashflow concerns.
HM Court Notices can also be helpful information. If HMRC have sent a winding up petition to the client due to unpaid debts you’ll be notified of it here, along with ‘safe alerts’ which tell you if the directors have been linked with other companies that have been liquidated. If a director has a history of liquidated companies… well, that doesn’t instil a lot of confidence in who you’re doing business with.
I must stress, in isolation each of these factors may not be negative. What you’re aiming to do with a credit check report is build a picture of your client.
Payment analysis
Not every client will have payment analysis available due to a small sample size, but if you’re working with larger companies there is usually data to dig into. You can see how many invoices are settled:
- within their payment terms
- overdue and by how many days
- outstanding
You will also be able to see the number of days an average invoice is overdue.
If the client typically pays invoices late, but everything else in the report is positive, this might indicate they have complicated internal credit control procedures which lead to long payment cycles.
Frustrating, yes, but hopefully not a cause for anxiety.
If your client has red flags
If there are concerning factors in the credit report you can approach the project differently. Not everyone has the luxury of turning work away, but you can mitigate the risk of non-payment by:
- amending your payment terms or accepting payment in full
- accepting a larger deposit
- having legal expenses insurance
- buying trade credit insurance if the risk score indicates chance of insolvency
The importance of running a credit check report and how to do it
One of our most popular value-added services is Timely, a credit control service. Before we start, we look into the client because this data can inform how we handle the formal late payment process. On many occasions we’ve uncovered some very obvious red flags.
When we highlight these to the freelancer, it becomes clear they weren’t aware of them and would have approached the project differently had they known about them. In other words, running a report like this can be used as a preventive measure to avoid any tricky payment issues down the line.
In terms of how to obtain this information, there are plenty of tools online but expect to have to pay to use them. Popular tools are:
If you’re a With Jack customer we can run a report for you free of charge. Just get in touch.
