Due diligence

The Importance of Performing Due Diligence Checks on Your Customers

by Nicolae Buldumac
The Importance of Performing Due Diligence Checks on Your Customers

When it comes to new business transactions, it is important that you have confidence in your customers - particularly if there are large sums of money involved and/or your potential clients are not well known. Performing due diligence checks on customers is common-place in the financial sector, where such background checks are not only logical but grounded in legislation. Businesses in other industries may balk at the idea of dedicating time and resources to screening customers, but the process can enable your company to avoid risky deals and ventures, and ultimately is one of the best ways to protect your assets, as well as your reputation.

What is Due Diligence?

If a business decides to perform a due diligence check on a potential buyer or business partner, it will usually mainly be financial in nature. This information is obtained with the aim of determining whether or not the customer is actually who they say they are, if they are likely to be able to afford the purchase or deal, and how quickly they are likely to make the payment. This background check should be made up of elements including:

  • Company profile - The trading addresses of the business along with details about its structure and directors. Information about any previous trading names can also prove to be very useful when it comes to looking for any potential risks.

  • Credit score - One of the most reliable ways to determine a company's trustworthiness as well as their ability to pay is to find out their credit score. Credit bureaus will use a variety of different factors in order to calculate the score, such as the company's payment history, revenue, and their overall use of credit.

  • Unfavourable public records - One of the biggest red flags when screening a company is learning that they have been granted negative records, such as liens, judgments, and bankruptcies. Obviously any businesses that have several such notes on their record should be approached with caution, particularly if they are recent.

  • Shareholder information - In order to get a thorough picture of a business, you'll want to know exactly who is involved or associated with it, so finding out who owns shares is an important factor. You should therefore ensure that the risk assessment service you use when researching businesses provides this information.

Why is it so Important?

There are a number of reasons why your business should give serious consideration to carrying out due diligence checks on customers, if you don't already. These most notably include:

Protecting your Business from Fraud

Are they who they claim to be? Without performing background checks on customers there's no real way to know for sure. As is shown in the infographic below, the most common scam that affects small businesses in fraudulent payments, with the average cost being around $6200. Due diligence checks can ensure you catch any unscrupulous behaviour such as identity theft and fraud, including possible inflated figures, instead of simply taking the word of a company that you know very little about.

Source: the Canadian Federation of Independent Business (CFIB)

Can they Afford to Pay?

One of the biggest advantages to performing financial due diligence checks on your potential clients is determining how likely they are to be able to afford the potential purchase. This could ultimately save your company money in the long run; for example if you choose to qualify leads in the early stages you will be able to weed out those who are unlikely to ever commit to buying, and focus instead on those who are.

When to Expect Payment

Knowing when to expect payment from clients can be important in terms of managing your company's own cash flow, particularly for new and/or small businesses. By carrying out financial background checks you'll be able to ascertain how likely your new customer is to pay on time through the payment history noted in their file. Not only that, but if you do notice a company has had a history of late payments you can protect your business by emphasising timely payment of invoices in your contract with them.

As the graph above demonstrates, late payments can be a big problem for small businesses, and unfortunately one that is also very common, with 64 percent of those surveyed stating that they had been affected by them. In fact, according to Sage Small Business Panel, small and medium-sized businesses are owed around $55 billion in late payments - that's an average of $12,000 per business.

How Stable is the Business?

Finding out how secure a company's future is looking is vital if you are considering entering into a long-term contract with them. While completing a due diligence check certain red flags such as multiple credit searches on their file in a short space of time, can indicate that things are going downhill and it is probably not advisable to go into business with them.

With this in mind it can also be a good idea to get into the habit of monitoring certain clients in order to ensure that their situation stays the same. Changes to a credit file can occur in a matter of a few months, so in order to know exactly where you stand with any businesses that you have deemed potentially risky it is vital to monitor their file.

Your Company's Reputation

If your customers hear about a business deal that went sour for your company it is likely to shake their confidence. Therefore, protecting your business from risky transactions can not only save you money but also stops your brand reputation from becoming damaged.

Legislation Compliance

If your company happens to be in the finance sector than completing efficient due diligence on your customers is not only important for all of the above reasons, but also to ensure that you are complying with the requirements of legislation set up to prevent financing terrorists and criminals as well as possible money laundering.

How to Perform Due Diligence Checks

When it comes to carrying out due diligence checks on your customers there are several different steps that you may need to perform. These might include seeking out banking references, public records, reports from credit bureaus, as well as visiting the business premises in-person and talking with the company directors or other staff members.

Although this all sounds rather time-consuming, thankfully there are options available which will make the whole process much more efficient. For example, using a risk-assessment service such as that offered here at Global Database means that you will have immediate access to all of the essential information required to decide if a potential deal could be harmful to your business. Not only will this save you precious time, it also ensures that the information you gain is up to date and accurate.

Due Diligence Failure Case Studies


In 1999 toy making company Mattel made the decision to purchase the Learning Company, in order to help them enter the interactive toy market. The transaction came with a hefty $3.5 billion price tag, but after a series of oversights while performing due diligence checks, Mattel ended up selling the Learning Company one year later for next to nothing - leaving them with a loss of $430 million.

Hewlett-Packard (HP)

In 2012 HP acquired Autonomy in a bid to move more towards the computer software market as opposed to hardware. However, the merger ended up turning sour, and after suffering a $5 billion loss as a result, HP was sued by its shareholders who accused the company of failing to carrying out thorough due diligence on Autonomy and therefore missing vital red flags.


The importance of financial institutions carrying out the required customer due diligence checks was greatly emphasised in 2015 when Barclays was fined £72 million by the UK's Financial Conduct Authority (FCA). The FCA had found that Barclays had neglected to perform thorough background checks on ultra-high-net-worth clients in order to take them on as quickly as possible. The fine was the largest ever imposed by the FCA.

Ready to Protect Your Business?

Now you've seen just how important customer due diligence checks are you'll probably want to ensure that your own business is safe from harmful deals and potential bad debt. With Global Database's Business Credit Reports you can do just that. Our unique methodology provides users with an accurate and realistic credit score, as well as suggested credit limits, so that you are able to qualify prospects and suppliers and set realistic credit limits.

We also provide immediate access to vital background information, including company profiles, shareholder information, and any liens, judgments, or bankruptcies - allowing you to make an informed decision before going into business with new clients.

Want to see our award-winning credit risk platform in action? Request a demo and credit check your first company for free.


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