How to Complete Due Diligence on Suppliers

Carrying out due diligence on potential suppliers will ensure the smooth running of your business and minimize the damaging disruption caused by poor suppliers. In this article, Mark Halstead explores how you can mitigate the chances of being left in a bad situation by a supplier. Here are seven key indicators to look out for when carrying out due diligence on potential suppliers:

1. Accreditations, qualifications & insurance 

Although it may seem obvious, it’s important to check that your suppliers are a legitimate company with the correct accreditations, qualifications and insurance. If your supplier is a limited company in the UK, visit the Companies House website to check their office address, registration date, and download their latest accounts. 

To check the validity of VAT-registered suppliers within Europe, visit the VIES website. Don’t accept your supplier’s claim that they have certain qualifications or accreditations – ask to see certificates or contact the relevant registering body for verification. For example, if a company claims to have a management system like ISO9001 in place, check it on the ISO website to make sure it’s up-to-date.  

2. Terms of business

Make sure you’re clear on your potential supplier’s policies on payment, delivery, service level, returns and anything else important to the smooth running of the contract. Ask to see the contract and give yourself time to read it thoroughly, asking for clarification on any ambiguous points.  

Think about specific pain points in your industry and find out how the supplier plans to resolve them. For example, if you own a restaurant and need special ingredients shipped over from Spain, what will the suppliers do if they are not available? Will they find substitute products of the same standard, or will you receive a credit on your next order? Asking detailed questions like this will create an understanding between you and your supplier, managing both sets of expectations.  

3. References

Find out about existing customers’ experiences with the prospective supplier’s product or service. Ask for a few recent references and follow them up with a quick call or an email. Ask questions that are more specific than whether they would recommend the service or not, such as finding out whether their deliveries are ever late or how they deal with disputes. This will give you a broader view of working with the company. 

Checking Trustpilot or the company’s social media pages will also give you up-to-date user reviews, and an understanding of their reputation and whether their customers are satisfied.  

4. Key directors

As well as researching the company, always complete a check on key directors. It’s straightforward to complete a check, and it’s important for you to know who you are doing business with. 

Recently, there has been a raft of legislation for businesses to absorb and implement. Principally, the regulations place a responsibility on businesses to be aware of who they’re working with, making them accountable for any connection to money laundering or terrorist financing, intentional or accidental. So don’t cut corners on these checks – regulators are unlikely to be sympathetic. 

5. Who funds the business?

Find out who funds the business. Research suggests that businesses with a director/shareholder charge over business assets are 2.8 times more likely to fail than others. Given that the owners have access to detailed information on the current financial circumstances, their lack of investment doesn’t project a lot of confidence into the business. If the owners are not willing to lend capital to the business on open and unsecured credit terms, proceed with caution. 

6. Proposal quality

Look for suppliers with a competitive edge who want your business. This should be evident in their proposal – is it tailored to you and your needs, or does it seem like a generic document that they send to everyone? The best proposals and presentations make clear how using that supplier can benefit you, rather than simply listing all of the features of their product or service. Choose suppliers who value your needs and put time and effort into creating an engaging presentation that focuses on providing solutions to suit your needs. 

7. Financial health

Assessing the overall financial health of potential suppliers is necessary to minimize potential risks to your business. You can assess several factors that affect a company’s financial health, including liquidity, adverse financial information and business age. 

For example, if your supplier has only been trading for a year, you need to feel reassured that they’re not about to disappear. Financial health ratings also take into account capital adequacy, which relates to whether or not a business has enough capital for the industry it operates in.

No matter which industry your business operates in, completing your due diligence on suppliers is a must. Although it may seem like a lot of extra work at the time, carrying out thorough due diligence will help to ensure your business runs as smoothly as possible.

About the Author

Mark Halstead is a partner at Red Flag Alert, a platform that provides detailed financial health ratings on over 6 million UK businesses to help companies make informed credit decisions and conduct sophisticated due diligence. Their software gives users a clear view on the financial health of every business in the UK, with information updated daily and delivered in real-time.