But there are good reasons why you should make sure that you credit check every single customer before allowing them to place an order.
Imagine you were stood in the street, and a stranger came up to you and asked to borrow £100; would you give it to them?
Probably not, unless you knew them and knew you could trust them to pay it back. So why would you say yes to a stranger, just because you’re a business?
When you allow a customer to run up a bill without upfront payment, you’re effectively lending them your money, in the form of your goods and services.
Unless you credit check them, you have no way of knowing whether you can trust them to pay – and it doesn’t matter if they’re big or small.
- Big customers represent significant individual risks, and credit checking each of them can help you to avoid extending substantial lines of credit that will not be paid back.
- Smaller customers represent a significant aggregate risk, and only by credit checking all of them can you be confident that your company‘s total risk exposure is acceptable.
But that’s a paradoxical approach, as it’s only by credit checking them that you identify which represent the greatest risk to your company – you shouldn’t be guessing which are risky, and then only credit checking those.
Finally, by adopting a holistic approach to credit control, you gain the greatest possible understanding of your overall risk profile, allowing you to manage your liabilities in an informed manner – and this puts the control of your cash flow firmly in your own hands.
However, Citizens Advice has found that many payday lenders are failing to carry out even the most basic credit checks on their customers, making it impossible for them to know whether the debtor can afford their repayments.
In the payday loan industry, where interest rates become punitive very quickly if the debt is not repaid, this could have adverse consequences for the typical borrower.
According to Citizens Advice, 65% of payday loans do not include a standard credit check, despite the industry’s customer charter, launched in November 2012, which pledges to check that customers can afford to take out a loan.
“Many find they have no money to put food on the table, pay the bills or get to work, as lenders drain their bank account in a bid to claw back the debt.”
The research also found:
- 84% of lenders did not treat their customers with sympathy;
- 71% did not explain the costs associated with extending a loan;
- 85% did not freeze interest and charges when the customer informed them of repayment problems.
The figures are based on research conducted between November 2012 and March 2013, a period during which 11,000 people approached Citizens Advice for assistance with payday loan problems.
Over the past four years, the issue has increased tenfold in terms of the number of applications for advice received by Citizens Advice, leading the organisation to call on the payday loans industry to stick to its customer charter, and stop irresponsibly lending.
Nearly 160,000 mortgages were in arrears at the end of the first quarter, where the arrears totalled 2.5% or more of the total amount owed on the mortgage.
At 1.4% of all mortgages, that’s the same proportion as in the previous quarter, and in the same quarter of the previous year, showing both short-term and long-term stability.
But with one in 70 mortgage-holders facing arrears of over 2.5% of their total mortgage debt, it’s still clearly cause for concern that many householders are failing to meet their minimum monthly repayments.
Paul Smee, director general of the CML, says: “Anyone who is worried about their mortgage can be assured that, as long as they take steps early to address them, most problems can be contained.
“Lenders very much want to enable people to stay in their homes wherever they have sustainable prospects of getting their mortgage back on track.”
For 2013, the CML has maintained its previous forecast, which predicts:
- 160,000 mortgages in arrears of 2.5% or more by the end of the year;
- 35,000 repossessions in the year as a whole.
Significantly, one in five repossessions in the first quarter were of buy-to-let properties, showing that private landlords remain a significant factor in the nation’s overall repossession risk, and that their tenants are at risk of losing their homes due to their landlord’s financial instability.
In the recent months we have seen some established companies go into liquidation. 90 year old companies that you would have had no hesitation in opening an account with an unlimited credit limit probably without credit checking them because of their size and status are now in liquidation.
It is key to credit check your existing clients on a regular basis. You may have a long standing client that you think would never default, however their payments are becoming increasingly late and you are finding that you may have to ring them or send them reminder letters something you have never had to do in the past. This is one of the first signs that the company may be experiencing problems and preventive measures are essential.
You may feel uneasy about carry out a credit check, but take a moment to ask yourself why? If you went to any high street store they would not entertain opening an account without first carrying out a credit check. If your prospective new client shows concerns with regards to completing an application form and having a credit check ask yourself why.
If you have any questions call Cash Protection Agency on 0116 2688965 to discuss company credit checking options which may be available to you.
The average expected shortfall is £22,100, but in 15% of cases it could be over £50,000, while 33% of those who expect a shortfall believe it will be of less than £10,000.
Endowment mortgages in particular have been the subject of mis-selling investigations in the past as, during turbulent economic times, the value of the investments intended to repay the loan can fall.
So with them back in the headlines, what are those in the industry saying?
Saga believe a quarter of a million over-50s will have to sell their homes in order to cover shortfalls on interest-only mortgages.
In this age group, the average shortfall is £49,000, say Saga, and a million endowment policies are insufficient to cover the relevant loan.
The FCA, interestingly, found that more than a quarter of interest-only mortgagors actually intend to sell their property as their preferred repayment strategy – either to downsize, or to return to renting.
The Council of Mortgage Lenders says it is working with its members to improve the information given to borrowers.
Within the next year, this should see all interest-only mortgagors whose policies are due to mature by 2020 contacted by their lender about their repayment plans.
Those with longer-term loans should be contacted at some point too, but it might not be within the coming 12 months.
Product comparison site MoneySupermarket.com has actually spoken in support of interest-only mortgages, saying that they are appropriate for the debtor’s needs in many cases.
Mortgage spokesperson Clare Francis says: “As the FCA’s report highlights, 90% of people with interest-only mortgages do have a repayment plan in place, and they are not inherently a bad product.”
The coming months are likely to be of particular interest to those for whom interest-only mortgages are the only affordable option, as any crackdown on their use could see a broad range of buyers priced out of the property market once again.
The vast majority of small to medium-sized enterprises found it possible to gain credit through an overdraft arrangement in 2012, according to the SME Finance Monitor from BDRC Continental.
In the latest 2012 end-of-year report from the ongoing data series, BDRC reports that 73% of new overdraft applications were approved last year.
Coupled with overdraft renewals that did not require fresh applications, that takes the success rate to 90%, meaning just one in ten firms that sought lending in the form of an overdraft were unable to gain approval.
Among those who were granted an overdraft, seven in ten were put in place within a week, and nine in ten overdrafts were available well before they were needed.
In terms of non-overdraft loans, 57% of all applications made throughout the year were successful, of which around two thirds were in place within a fortnight of approval.
According to the 2012 end-of-year report, “recent applications for new loans or overdrafts have been more likely to come from first-time applicants and/or those with a worse-than-average external risk rating, and such SMEs remained less likely to have been successful”.
Of those whose application was declined, just 14% of overdraft applicants and 8% who applied for loans were aware of the right to appeal; two-thirds rated as ‘poor’ the information provided to them by their bank.
Some of the measures included in the regulation already existed; however, others have been introduced that, for the first time, make it clear that you should not end up out of pocket at all if you have to take action against non-payment.
Firstly, let’s look at the measures that were already in place – and these include a three-tier fixed-fee system of penalty charges for late payment, as well as the right to add statutory interest to the amount owed.
The fixed fees are: £40 on amounts owed of up to £1,000; £70 on sums up to £10,000; £100 on any larger amount owed.
Significantly under the new Directive, you can now also add any reasonable additional costs to the amount claimed, in order to cover your own fees incurred in chasing the debt.
For the first time, it is enshrined in law that you can reclaim these costs from the debtor, rather than paying them out of the amount that is successfully reclaimed.
You cannot profit from doing so – if you add extra costs above the relevant three-tiered fixed fee, the total of the two combined must not exceed the amount you have had to pay to chase the debt.
However, this means it should cost you nothing to reclaim what you are owed, while the statutory interest can add to the total, potentially by a significant degree on debts that have been owing for several years.
Third-party debt collection is all about money, and rightfully so – when you are not paid money you are owed, it is only right that you should pursue for settlement of the account.
Figures from the Registry Trust, which compiles official statistics on the number and value of court judgments against consumers and corporations, show a decline in debt judgments against businesses in 2012.