Credit checks and financial analysis are essential tools for evaluating a supplier or client’s ability to pay and finance a project, particularly in the construction industry.
According to Experian, a leading credit reporting agency, conducting thorough credit checks can help prevent financial losses and minimize the risk of non-payment (Experian, n.d.).
These red flags can indicate a company’s poor credit control, which may result in difficulties in getting paid or completing the project.
For instance, multiple credit checks, nil assets, or CCJs against the company should raise concerns (Experian, n.d.).
Fortunately, most credit check portals provide comprehensive information, making it easier to identify these issues (Experian, n.d.).
If you’re unable to access this information, you can calculate a liquidity ratio to assess a company’s financial stability (DeFrang, 2019).
Conducting credit checks on clients can help you avoid the financial risks associated with non-payment or unfulfilled projects.
For example, in the construction industry, companies may go bankrupt or fail to pay their suppliers, leaving you with outstanding debts (Baker, 2018).
Land surveying clients with poor credit control may also compromise on the quality of their work, insurance, or professionalism.
To mitigate these risks, it’s crucial to investigate a company’s credit history and assess its ability to pay for your services (Baker, 2018).
Furthermore, evaluating a company’s liquidity using a liquidity ratio can help you determine its ability to support a project of a given size and duration.
For instance, if a survey estimated to cost £50,000 is expected to take several months to complete, a company with a limited working capital base of £20,000 per month may struggle to cover its expenses and potentially go insolvency (DeFrang, 2019).
To avoid such risks, it’s advisable to scrutinize potential clients’ financial stability before engaging your services.