Why you should do due diligence on all clients - no matter how big or small
Why you must conduct due diligence on your clients
Small companies often fall prey to this: a prospective client appears successful and well-oiled. You land the client, sign the paperwork and start the work. Maybe payment is received for the first month. By month 3, they're a bit behind but they've given you legitimate reasons for it. They were in hospital, they had car issues, the Accounts lady was on leave, they were waiting for some other event to happen, they were out of the country, they had a cold, the rugby was on. You regard the client as generally honourable, and continue the work.
Before you know it, 12 months have passed, and you haven't been paid.
And you will never be paid.
You've just been swindled by one of the many unscrupulous business owners in South Africa who don't pay their service providers.
These types of business owners are either just bad at financial planning, serially unlucky, or - more likely - they purposefully screw small company owners because they know it's financially unfeasible to take legal action against them. They arrange their companies into shells to hide their assets and make it impossible to ever get any effective judgment or debt recovery against them.
That's why the only solution is not to go into business with clients who do not meet your due diligence criteria.
A prospective client may appear financially successful, yet have a history of unpaid debts, multiple judgments and persistent defaults. But the fancy car is owned by the bank, the big office building is bonded, and their credit record shows a horror story.
Before entering into a business relationship, allow us to conduct full due diligence into the client including:
a credit enquiry against both the company and the individuals behind it (directors);
an analysis of what lengths they've gone to to hide assets (like creating multiple shell companies and trusts);
assess their record of previous sequestrations or liquidations; and
an assessment of the contract terms the client is trying to force you to sign.
These enquiries may reveal material financial risks which might make you think twice about doing business with a prospective client.
Smaller company owners, who may be desperate for work, often forego these checks - with devastating consequences.
Fine tune your contracts
According to National Credit Regulations, in order to conduct such enquiries on clients your terms of service contracts need to be drafted in a certain way. Your contract should expressly provide for these enquiries, both before contracting and, where appropriate, during the relationship. The clause should authorise the relevant checks and provide for the lawful processing of the information obtained, subject to applicable legislation.
Prevention is better than Cure
Due diligence is far less costly than litigation. Identify the risks before extending credit, delivering services or committing resources. By the time a client defaults, you may discover that you are merely another creditor in a long queue of unpaid claims.
Protecting SA Business Owners Since 2019.
As commercial attorneys in Pretoria, we have advised commercial clients on all legal aspects of business, including contracts, debt collection and urgent High Court litigation - most recently in an anti-dissipatory interdict to prevent disposal of assets.
Contact us for experienced advice on your commercial legal problem.
The above information is for illustrative purposes only and does not take into account your specific circumstances. It therefore does not constitute legal advice. Please contact us for comprehensive advice to address your circumstances. Under no circumstances should any person use the above information in an attempt to circumvent the provisions of legislation or contract, or to cause damage to any other person. Always ensure you and your company are in compliance with the law in all dealings. This information is accurate as of the date of publication. All persons, characters, businesses and events depicted herein are fictitious and are used for illustrative purposes only. Any resemblance to actual persons, living or deceased, real businesses, organisations, events or circumstances is purely coincidental and unintended.
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