Posted by Author: Florian Wierzchowski
To find out about the situation of your potential counterparty, you have a whole spectrum of possibilities and means at your disposal. From white intelligence – simple, free, publicly available data – to business intelligence, which will provide detailed albeit paid information. I will discuss a few of these below.
The first, although not obvious to many entrepreneurs, method of verifying our counterparty’s situation is to ask them directly for their own information on their current financial situation. This could be a report for the last month, quarter or year. This method is commonly used by financial institutions, such as banks or leasing companies, and no one has any problems providing them with such data. It is certainly worth a try – prepare the appropriate form and send it to the counterparty for completion and return.
The second option is to review the documents at the National Court Register. Companies registered with the National Court Register are obliged by law to publish their latest financial statements and activity reports there. The advantage of this solution is that it is free of charge, no fees are required. The disadvantage is the issue of timeliness and the fact that we will not learn anything from the register about companies not entered in the register – newly established, sole proprietorships, civil partnerships. More often than not, the reports for the last financial year are published a few months after the end of the year, and a lot can go on for a few months. Another way to look at publicly available documents is to look at portals that publish stock market information. Insofar as a company is publicly listed on a stock exchange, it must post quarterly reports and, in addition, publicly report information on significant current events in the company.
Another option, of course, is to use a web browser and search for as much data and opinions about the counterparty as possible on the basis of the data available on the Internet. Information about the counterparty – its reputation and the trust it enjoys or does not enjoy – can also be formed on the basis of the opinions of friends of individuals and companies operating in the same industry.
Another method is to use paid tools offered by debt collection, factoring and business intelligence companies. These companies collect and hold financial data on a range of companies and then make this data available for a fee. They may refer to a simple assessment of financial standing (scoring), which is limited to assigning a number or letter to a particular business that is on the solvency scale. E.g. A – very good standing, F – very bad standing. They can also present trends – whether the situation is improving or deteriorating, or they can directly alert that it is very risky to work with the entity.
Another option is to use a business intelligence agency. Business intelligence agencies are specialised entities in investigating other businesses. They not only use white intelligence, i.e. publicly available information, but can also engage detective agencies to screen a counterparty as best as possible on behalf of the investigator. While the data obtained in this way will be as accurate as possible, it must be reckoned that the service will be the most costly of all.
Of course, it is understandable that you will always assume a certain level of acceptable risk and transactions of negligible value will not require counterparty screening for you, as the amount of work and resources involved would simply make it uneconomic to undertake. In that case, we would say that the skin was not worth the skin. Therefore, define for yourself a level of value, for both purchases and sales, beyond which you will always investigate the counterparty situation – this will be your materiality threshold. You can define more thresholds and allocate appropriate tools to them – the higher the risk value, the more resources you should invest in investigating the customer.
The above measures are not the only and exclusive ones, moreover, sometimes there will probably be decisions that go against all signs in heaven and earth, both positive and negative. However, I hope that the description of the above tools will provide you with important hints for taking risks in your business adventure and when establishing new business relationships.