Warning signs that a potential client isn't worth doing business with

A trade credit insurer has warned businesses against operating based solely on trust, saying it is a risky practice that “can result in losses that can quickly get out of hand.”

“Businesses should consider taking out trade credit insurance, which can protect the company if customers don’t pay,” said Atradius’s Mark Hoppe, managing director for ANZ. “It can also help businesses [to] do more thorough due diligence before deciding which customers to trust.”

To avoid cash-flow issues that result from non-payment of customers, Hoppe said the key ingredient is “choosing the right companies to business with.”

“It’s important to understand the warning signs that could indicate a potential customer could cause a problem by not being able to pay,” he said.

Hoppe identified 10 warning signs that could indicate that a potential customer isn’t worth the risk of doing business with.

1. Too much debt. A company whose operations are mostly funded by creditors may have some difficulty servicing that debt and may not be a valuable business partner.
2. Over-expansion. A company that expands faster than its cash flow would allow, by taking on debt to fund the expansion, may present risk – even if the business owners have experience and know what they’re doing.
3. Lack of clarity. Businesses that are unclear about what they do and how they generate profit are best avoided, as they present a significant amount of risk.
4. Qualified accounts or going concern commentary. Qualified accounts are audited accounts where the auditor has doubts or disagreements with the firm’s management; while ‘going concern commentary’ – which though not as serious as qualified accounts – can be a sign that the auditor is protecting themselves from litigation but is still signing off on the accounts. These are warning signs not to do business with a company.
5. Profit warnings. A profit warning is the clearest sign that a company won’t meet its earning expectations and could be a signal that the business may be in trouble.
6. Profit versus cashflow. Doing business with a company with strong profits but little cashflow is highly risky as this could be a sign that the company is hiding issues, as well as a sign of dodgy accounting practices.
7. Irregular payments. Irregular payments, or payments that come in lumps after long periods of non-payment, could be a sign that the company’s cash flow is compromised. Deciding to continue doing business with a company in this situation can depend on past payment history, current relationships, and the reasonable likelihood of the business getting its cash flow back on track.
8. Unstable leadership. If there are lots of changes or signs of discontent at the board or leadership level, such as surprise resignations, this could be a sign of trouble ahead.
9. Trappings of success. Directors that have high-end, brand new cars, computer systems, and furnishings can be a sign that they are rewarding themselves at the expense of the company. And while this isn’t necessarily a sign of trouble on its own, when taken in conjunction with other signs on this list, it could be a red flag.
10. Late filing of accounts. If the company files its accounts late, it could be a sign of general disorganisation or it could indicate that the business had trouble getting an auditor to sign off.

“As in most aspects of business, context is everything,” Hoppe said. “One or two of these signs in isolation may not be conclusive evidence that a company is failing. However, when enough of these signs come up together, or when the circumstances are especially severe, it’s a strong warning that your company shouldn’t do business with this customer.”