Cashflow

How due diligence can weed out dodgy suppliers and scammers

Patrick Coghlan /

due diligence

CreditorWatch chief executive officer Patrick Coghlan. Source: Supplied.

Recently, SMEs in Western Australia were scammed out of more than $70,000 by a dodgy food truck supplier. Unfortunately, business plans and expansions were put on hold due to the painful experience of placing trust in the wrong person.

However, this could have been prevented with the vital practice of due diligence.

Research would have revealed the bad supplier has a concerning track record. The seller had taken deposits and full payments from small-business owners for trucks but provided them nothing in return.   

Before making large purchases and investments, business owners should take the time and allow financial room to learn more about their customers and suppliers.  The food truck supplier example demonstrates that performing due diligence far outweighs the risk of blindly placing trust in a seller or customer.

Understandably, not every business has the time or resources to get to know who they are dealing with, but there are still simple things they can do.

1. Don’t just focus on debtors

There is a large focus on being aware of bad debtors, and there are red flags people can look for within these business relationships.

However, it is important to remember suppliers can pose a risk to your business as well.

While we’d like to trust everyone, debtors and suppliers should earn it first. When it comes to your business and cashflow, tread carefully.

2. Research and credit reporting

Before doing business with a supplier, do your research!

You can look up an ABN for free. Also, check to see if the business is registered for GST.

If business owners are able to, purchase an ASIC extract or research the business in credit-reporting platforms and look for adverse information like court actions, winding-up notices and cross-directorships. Check the address and phone number of the supplier. Identify if they have a website or online presence. Look for reviews from other customers.

These are simple steps that can go a long way in revealing whether or not a supplier is worth the risk.

3. Watch out for poor communication, excuses and unresponsiveness

Communication goes a long way in identifying dodgy suppliers. Establish communication standards from the start.

Pay attention to details and get things in writing. Look for transparency.

Don’t be afraid to research information that was provided by the supplier. Watch for red flags like excuses and unresponsiveness.

4. Negotiate payment terms

One business paid the food truck scammer in full! Instead, business owners should negotiate a deposit they feel comfortable with and cash on delivery.

Explain that cash on delivery establishes initial trust between the business and the supplier. If there is push back on payment terms or no room for negotiation at all, you’ll probably want to take that as a red flag.

Due diligence goes a long way in preventing risk and it is a key component of doing business. And it doesn’t have to be hard or costly.

Cashflow is king, and all it takes is one bad debtor or supplier to ruin that.

When it comes to taking to next steps for your business, ensure that you’re across any risks and remain vigilant.

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Patrick Coghlan

Patrick is the chief executive officer at commercial credit reporting agency CreditorWatch.