The prospect of a new client or supplier coming on board is exciting for any small business. You want to sign the contract as fast as possible so that you can start building what will hopefully become a long-lasting relationship, but in this situation, it really is better to bide your time and do your research first.

Jumping the gun can lead to all sorts of problems later down the line, including late payments, written off debts and in the most extreme cases, criminal activity. It may sound like scaremongering but it happens more than you might think.

Company Check recently looked into the issue of financial risk by carrying out a survey with 500 business leaders from across the UK. The results? More than two-thirds (68%) of firms said they’ve had to deal with late payments, while 53% have had to write off bad debts. 63% also said they do not insure themselves against financial risk should things go wrong.

The start of a downward spiral

Chasing unpaid invoices takes time that could be better spent growing a business, and is likely to have an immediate impact on the cash flow of an SME. This may mean that a firm has to pay its own supplier/rent/utility bills late (which could affect its credit score) or take out a loan to cope with the loss (increasing its liabilities). In some cases, entrepreneurs may even take a cut from their own pay packet.

It's good to check whether you're doing business with a shark

Recent statistics from the Federation of Small Businesses (FSB) shows the average amount owed in late payments to UK businesses is more than £30,000. But - and here’s where it gets even more worrying - one in four SMEs go bankrupt if the average sum outstanding grows to £50,000. That’s not a lot to accumulate if you have a number of clients who are all late on payments..

Time to get your detective hat on

Luckily there are some very simple things a business can do in order to mitigate the risk of any of this happening to them; all it needs is a little investigative work. Looking at a firm’s accounts will give you an indication of its overall financial ‘health’; how much profit it is making and how much debt it is in etc.

This information is filed annually to Companies House and can be found through credit checking websites, which allow you to search for any UK or EU firm.

Large firms must declare everything including annual turnover, assets, liabilities, net worth and director reports, while small firms have the option of submitting a simple balance sheet (often without turnover and profit and loss), known as an ‘abbreviated’ account.

A business is classed as ‘small’ if it meets two of the following criteria: Has an annual turnover of £10.2 million or less, total assets of £5.1 million or less and no more than 50 employees on average.

Where small businesses take advantage of filing abbreviated accounts, there are still lots of things you can learn by analysing the data.

An honest chat will reveal a lot

With larger firms, the most important things to pay attention to are turnover, assets, liabilities and net worth. Has its turnover been increasing year-on-year? Are its liabilities higher than its assets?

You should also take note of how long a company has been going for, whether its business directors are easily accessible (or whether any of them have a large number of closed or resigned directorships), whether it has a good credit rating and a low ‘risk score’ and whether it has been issued any County Court judgements (CCJ) in the past.

In most cases debt can usually be recovered without the need for (expensive and often lengthy) court action, but a CCJ may ensue as a last resort.

Weigh up the risk

Some concerns may be able to be redressed with an honest conversation with the prospective client or supplier. But if your gut instinct is telling you that the risk is too high, then you’re probably right; play it smart and walk away.