This may sound like a strange question but a lot of people don’t actually know who their customer is. The reason for this is – they don’t ask! Even if you’ve known your customer for 20 years you must know their legal entity. The reason for this – if you are owed money and have to take further action their legal entity is vital to start the ball rolling. If you don’t know then you may leave yourself with a bad debt and unable to recover through the proper channels.
Here are the most common types of liabilities:-
Sole trader – Mr Smith t/a Smith Contracts
This is an individual (not a company) who is the business owner. In the
event of the failure of the business, the individual faces bankruptcy and
is personally liable to pay any losses to creditors. A sole trader has no obligation to lodge annual accounts. One way to check them out is to carry out a personal credit check on them.
Partnership – Smith & Jones Partnership
A partnership is to be treated the same as a sole trader. In the event you are not paid from a partnership all partners are joint and severally liable to pay the outstanding debt.
Ltd company – Smith Ltd or Smith Ltd t/a Smith Contracts
A company is to be regarded as a “separate legal entity”. This means it will have its own bank account and its own credit rating. Always check out how long the ltd company have been trading, trade references and credit rating before giving out credit. If the company ceases to trade, is liquidated, or dissolved before you have been paid then you can be left with a bad debt. A director or shareholder of the company is not liable for any debts unless you made them sign a personal guarantee.
Public Ltd company (PLC) – Smith Contracts PLC or Smith PLC t/a Smith Contracts
A PLC is owned by shareholders. These shares can be bought by the general public. They are listed on the stock exchange. As with an Ltd company – check out their credit rating etc. before giving out credit. A PLC company usually has a lot of published information regarding them through financial press and a websites.
As mentioned at the start it is important you know who your customer is. The best and most efficient way to do this starts with getting your customer to complete a credit application form at the beginning of your business relationship. It’s never too late even with existing customers. We are happy to supply you with a draft credit application form that can be altered for your own particular needs. Just complete our Contact Form and we will email you a copy by return.