Can conducting due diligence on debtors improve cash flow?

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Conducting due diligence is about gathering as much information as possible about the financial state of new clients. Understanding their ability to pay allows you to think about your own cash flow, and how you'll keep up with essential outgoings while waiting for them to settle what they owe.

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What is debtor due diligence?

Doing your due diligence means carrying out thorough research before you start a new contract. Ideally, you'll want to have evidence that the company you're about to work with, aka your soon-to-be debtors, have the financial resource to pay for the goods or services you provide.

Exactly how you assess the financial capability of your clients depends on your business and the level of risk you're willing to accept. However, you'll generally look at:

  • Profit and loss statements and balance sheets.
  • Legal and financial concerns including history of bankruptcy or regular late payments.
  • Historical records and future projections.

As due diligence requires you to go through debtor files in substantial detail, it is usually conducted by a financial or legal expert - someone well-versed in looking for inaccuracies or red flags.

Making decisions following due diligence

By conducting due diligence, you should have a pretty good idea about when you'll receive the funds owed to you. For example, you may know that a good number of your customers can pay immediately, but one or two high-value clients can't. This doesn't mean they're bad companies to work with, it might be that the company can't afford to pay you until they get compensated for a job they're doing. To complete the job, they need the resources you provide, and can't invoice their client until they've finished.

Having this type of detailed assessment of your potential clients allows you to make informed decisions about what level of guarantee you'll accept before signing a contract. For example, you might accept large purchase orders that are yet to be invoiced as proof that the money owed to you will be available by the time it's due. Alternatively, you may prefer to see that the company has a substantial savings account to dip into if required.

How does due diligence help small business cash flow

To keep trading, you need working capital available to spend. If your debtors don't pay up straight away but your outgoings continue, you'll start running out of money. You'll still have bills to pay, and will want to commit to new contracts with other clients that may require you to invest in man power or raw materials.

The knowledge you gain from carrying out good due diligence gives you critical insight into when your debts are likely to get settled. It allows you to plan ahead and minimise the effect on your business because you know which periods are going to be the most difficult to manage.

One way companies can cover the slow times is by working with debtor finance. This solution means you receive a percentage of the value you've invoiced for, and repay it when your debtor settles their bill. As these services only come with a small fee and don't require long-term commitment, it's an easy, cost-effective way to ensure you can continue to operate as normal while you wait for payment. It gives you the power to work with valuable clients, even when they can't pay for your services immediately.

With your cash flow covered by a debtor finance solution, you can also approach your sales opportunities with more confidence and commitment. Knowing you have the funds to invest in the materials you need allows you to offer an immediate start, and outpace your competitor's offers around delivery timelines.

 

Classic Funding Group specialise in offering debtor finance solutions to all types of businesses across a wide range of industries. We talk to you about your business needs to ensure we provide a smart solution that helps your business thrive.

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