It pays to be judicious with the customers with which you do business – and there are some customers it may be best to avoid altogether.

It can be hard – particularly when you're starting out or when business is slow – to turn away a customer.

But there are some customers that put your time, money – and a whole lot more – at risk. 

Here are five warning signs to watch out for in initial business dealings.

 

1. Bad credit history

If a potential customer has a history of either late payment or non-payment, there’s a serious risk you could be out of pocket.

There are a number of ways you can quickly and easily check a potential customer's creditworthiness, starting by asking peers within your industry what their experience with the client has been – it's a small world, after all. 

You can also ask the client for trade credit references and obtain business and personal credit reports from agencies such as Equifax and illion (formerly Dun & Bradstreet). 

But no matter how careful you are, if you trade or sell goods and offer customers credit, you are at risk of bad debts or non-payment by customers, which may significantly disrupt your cash flow.

That’s why trade credit insurance is a great way to help protect your income and business assets against potential customer insolvency.

 

“Contracted items that are not fulfilled by a customer can hit your business hard, especially if it is an unexpected disruption”

2. Verbal agreement

Beware of customers that are keen to do a 'handshake deal'. If you have a verbal agreement in place and a dispute arises, it can be very difficult to prove the terms of the agreement. 

This can lead to a he-said she-said dispute and a large legal bill. Here's a handy guide to doing business, which covers: 

Contact details
Terms of the arrangements
Costs
Returns policy 

It’s a good idea to have standard terms of trade when dealing with customers.

3. Poor communication or making excuses

“Sorry, our email has been playing up,” “we're restructuring,” “we're changing bankers,” “the product wasn't up to scratch” or “the dog ate the cheque” … 

If someone is making excuses for either late payments or failing to get back to you promptly, these may be red flags when dealing with customers. 

Contracted items that are not fulfilled by a customer can hit your business hard, especially if it is an unexpected disruption. So ensure you enter into a written contract with your customers to reduce this risk.

 

4. Payment irregularities

Even if you do receive payment, the manner in which you're paid may provide hints that a customer's business is struggling.

Some of the signs of deterioration in a customer's business can include:

Failure to meet credit terms previously agreed 
Slow payments
Asking for more favourable credit terms
Only making payments when reordering
Disagreements over invoices, resulting in short payments
Delays in sending out accounts

 

5. Difficult customers

Some customers constantly complain, some are always demanding a discount, while others unnecessarily request you to redo jobs that were perfectly fine the first time around.

If you're spending too much of your time trying to please one customer, there's a good chance you'll neglect a large chunk of your already satisfied customer base.

That said, it's important you end a relationship with your customer on good terms because as mentioned, it’s a small world.

Protecting your business

No matter how good you are at reading the signs, sometimes a bad customer gets through and you're left footing the bill or fighting a legal battle. That's when good business insurance pays off.

Public liability insurance can help protect your legal liability to third parties, including clients, customers and the public for injury or damage to their property, caused by the business.

While product liability insurance can help cover you against the cost of investigating and defending your business against a claim made against you and your product.

To discuss the best ways insurance can protect your business from bad customers, contact your Steadfast broker.

 

Important disclaimer - Steadfast NZ Limited, its related companies and associates.

The views expressed are those of the author only and do not necessarily reflect those of Steadfast.

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