As any small business owner knows, getting paid on time and maintaining a healthy cash flow are key for the survival of a business. According to a recent survey*, 62% of small businesses don’t think they could survive the next three months if their invoices owing were left unpaid.
Knowing who you’re getting into business with can help mitigate some of the risk around not being paid.
Announced at Xerocon South last year, we’ve teamed up with Equifax (formerly Veda) to pilot a feature that gives small businesses in New Zealand and Australia access to tools long used by lenders and big businesses to help them make better lending decisions. Previously only available from separate credit checking services, we’re now partnering with Equifax to let small businesses on Xero see what big companies have always had easier access to. Banks and other big organisations already use credit reports to check on the credit risk of their potential customers, suppliers and partners.
Ultimately the credit risk indicator protects small businesses many of who work on tight cash flow, to check they are using suppliers and partners who have good credit indicators.
Credit risk was an issue recently faced by a cabinetry business in Perth. One of Xero’s accounting partners recalls a construction business client that lost $151k on a job. The small business was contracted to do $151,000 worth of work for a client in the construction industry — a large job by any means. They completed the work on time and invoiced the client, as per normal procedures.
However, after months spent chasing the client to pay their invoice, the business owner received a call with bad news. The construction client had gone into liquidation. The business had been trading while insolvent, withdrawing money from the business and moving it to other bank accounts. If the cabinetry business had the tools to do a business credit check, they may have reconsidered or changed the payment terms to be paid upfront.
While we think this is an innovative and bold feature, and truly believe small businesses will be better off knowing the credit risk of the people they do business with, we also realise it may make some business owners uncomfortable about having their credit risk indicator available to other Xero users. Initially this credit risk indicator will only be available to a small pilot group. We’ll monitor the feedback carefully so it’s a positive experience.
Credit scores are the norm in the US and other markets where they are widely used to help assess both personal and business credit risk. Together with Equifax we’re providing more information to help small businesses make better decisions when dealing with their own customers. We believe it will have a good impact on small business, but if there is any indicator report disputed, there is a clear path to raise it.
If a client or supplier happens to show a high credit risk indicator (AU) or trade payment rating (NZ) there are a few simple things small businesses can do to ensure they are paid. Things like asking for a deposit, or cash on delivery for potential customers that may be a risk of not paying their invoices or loans. This will help save businesses from having to write off bad debts or chase down late payers that will ultimately affect their cash flow and ability to do business in the long term.
In Xero using their street address, postcode, business name, business location, or ABN/NZBN, Xero pre-populates the contact information to provide a view of their credit risk. And should businesses want to learn more about a business contact’s risk, they can purchase SwiftCheck report from Equifax.
Where businesses want to dispute their credit risk indicator, they should first speak to the provider of the information to have it corrected. If you still think there is a mistake or error, you can contact Equifax to have it reviewed. Learn more for AU and NZ.
Xero does not exclusively hold this information or share information back with Equifax, Xero is simply making it easier for businesses to get access to a business’s credit (AU)/payment (NZ) score.
This pilot is an important step for small businesses to easily access tools which big businesses already use to better understand the people they do business with.
Disclaimer: The information contained in this communication is general in nature and does not take into account a business’ objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your business’ circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.