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Due Diligence - Get to Know Your Customers

If you’re running a business then it’s likely that you’ll know who your customers are – after all, you sell to them so it makes sense to know your customers so that you can give them what they want, be it products or services.  However, even if you’ve been dealing with a customer for many years, it’s important to know their legal entity.  This way, if they end up owing you money it will be much easier to take further action to recover any monies owed to you.  If you don’t know your customers’ legal entities, then you may find that getting them to settle a debt becomes a difficult and arduous process.

Here are the most common types of liabilities:


A sole trader may also be known as a proprietorship and is not actually a company, it’s an individual who is a business owner/operator.  If their business fails, then the individual sole trader will face bankruptcy.  The owner is in direct control and legally accountable for the finances of his/her business which includes debts, loans, losses, etc.   Because there is no legal obligation for a sole trader to lodge annual accounts, the best method of checking them out is to carry out a personal credit check on them.


For business purposes, a partnership should be treated in the same way as a sole trader.  A partnership is an arrangement where parties (known as partners) agree to cooperate to advance mutual interests.  The partners in a partnership can be individuals, companies, or other organisations.   There are two types of partners – general partners who have a legal obligation to third parties or limited partners whose liability is limited to their investment in the partnership.  If you are owed money by a partnership then you need to be aware that all of the partners are jointly liable to pay the outstanding debt.


In a limited company, the liability of members of the company is limited to what they have invested in or guaranteed to the company.  The company is regarded as a “separate legal entity” which means it must have its own bank account and its own credit rating.  If a limited company ceases to trade, is liquidated or dissolved before you have secured payment from it, then you may be faced with a debt that you’re unable to collect.  A director or shareholder of a limited company is not liable for any debts unless they have signed a personal guarantee.  Always do due diligence and check how long a limited company has been trading and check trade references and the credit rating before doing business with the company for the first time.


A PLC is owned by shareholders – the shares can be bought by the general public and the company will be listed on the stock exchange.  As with a limited company, make sure to do due diligence and check out the credit rating before giving credit to a PLC.


Making sure you know who your customers are and how they trade can be an effective method of ensuring that you take all the steps possible to avoid a situation where you’re left with money owing to you that is difficult to collect.  If you do your due diligence, you will lower the possibility of having to seek the services of a debt collection firms to recover debts owed to you.