Checking a customer will pay, before you start

Get the name exactly right first

Before any checking, find out precisely who you are contracting with. "Dave from Hilltop Builders" is not a legal entity. Hilltop Builders Ltd is, Hilltop Building Services Ltd is a different one, and Dave trading as Hilltop Builders is a third.

This matters at both ends. It decides who you can pursue if it goes wrong, and a claim against the wrong entity fails however good your evidence is. Ask for the full registered name and company number, and put both on the quote and the invoice.

Being asked to invoice a different company from the one that hired you is worth a second look. Sometimes it is ordinary group structure. Sometimes it is an invoice being routed to the entity with nothing in it.

The free five minute check

Search the company at Companies House. Everything below is public, free, and takes less time than driving to the site.

• Incorporation date. A company formed six weeks ago taking on a large job is not automatically bad, but it has no track record to check and no accounts to look at.
• Filing history. Accounts overdue or a compulsory strike-off notice are the clearest warnings you will ever get, and they are on the front page.
• The accounts themselves. Small company accounts are thin, but net assets and whether they are shrinking year on year are visible and worth thirty seconds.
• The directors, then each director's own record. A director with a string of dissolved companies at the same address is the pattern behind most of the stories tradespeople tell about being stiffed.
• Registered office. If it is a formation agent's address in another city and the business trades locally, that is not fatal, but note it, because it is where you would have to send a letter before action.
• Charges registered against the company. Existing security tells you who gets paid before you do if it goes under.

When to pay for a credit report

Paid services such as Creditsafe, Experian and Red Flag Alert add a credit limit, a risk score and, most usefully, county court judgments registered against the business. A CCJ is somebody else who has already been through this with them.

For a one-person trade business the honest advice is to keep it in proportion. A single report on a large first job with an unfamiliar contractor is money well spent. A subscription is not, unless you take a lot of commercial work from new customers.

There is a free proxy for a lot of it. Ask other tradespeople. Local trade groups and merchant counters know which contractors pay and which ones do not, and that knowledge is usually more current than any credit file.

The red flags that are actually predictive

Some warning signs are noise and some are not. These are the ones that repeat.

• Vagueness about who you are contracting with, or reluctance to give a company number.
• Refusing a deposit on a job with real material costs. Someone who cannot fund materials will struggle to fund labour.
• Urgency without a reason. Pressure to start tomorrow, before paperwork, is how people get committed before they have checked anything.
• Wanting the paperwork done later. There is no job on earth where the quote cannot be sent before the work starts.
• Rate-shopping right at the end. A customer negotiating hard at the point of acceptance has told you what the conversation about the final invoice will be like.
• Previous trades who left. Ask why the last person is not finishing it. Sometimes the answer is genuine. Often it is your future.

Domestic customers, where none of this exists

You cannot credit check a householder in any practical way, and you should not try. What you can do is make the payment structure carry the risk instead.

Take a deposit that covers the materials you have to buy. Not a share of the profit, the materials, so that a job abandoned halfway does not leave you paying a merchant for someone else's bathroom.

Stage the payments on anything running more than a week, so the gap between work done and money received never grows past what you could absorb.

Get the acceptance in writing before you start, even by text. A customer who will not confirm a quote in writing has told you something.

And be aware that for work agreed at the customer's home you have a positive obligation of your own: the Consumer Contracts Regulations 2013 give them 14 days to cancel, and you need their express written request to start inside that window or you may not be able to charge for what you have done.

Checking again, on the customers you already have

The contractor who paid on time for two years and has started paying at 60 days has told you something more useful than any credit report, and earlier. Repeated late payment is not usually a personality trait. It is a cash flow problem arriving.

The thing to manage is your exposure. If one contractor already owes you two months of work, the question about the next job is not whether the rate is good. Nobody plans to have a third of their year's income with one customer who has stopped paying, and quite a lot of people end up there.

Common questions

How do I check if a company will pay before I start work?

Search them at Companies House, which is free. Look at the incorporation date, whether accounts are overdue, whether there is a strike-off notice, and the directors' other companies. Then, for a large job or an unfamiliar contractor, buy a single credit report to see any county court judgments against them.

Can I credit check a homeowner?

Not in any practical way, and consumer credit checks need a lawful basis and their permission. Manage the risk through the payment structure instead: a deposit that covers materials, staged payments on longer jobs, and written acceptance before you start.

What are the warning signs a customer will not pay?

Vagueness about the legal entity, refusing a deposit, pressure to start before anything is in writing, hard negotiation at the moment of acceptance, and a previous tradesperson who left the job unfinished. Any one of them can be innocent. Two together are worth walking away from.

Does a CCJ against a company mean I should not work for them?

It means somebody else has already had to go to court to be paid, which is the most direct evidence you will find. It is not automatically disqualifying, particularly if it is old and satisfied, but it should change your terms rather than be ignored.

Do the maths

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More on getting paid

• Letter before action for an unpaid invoiceA free letter before action template for UK tradespeople owed money, what the pre-action rules require you to enclose, and how long to give them to pay.
• Taking a customer to the small claims court over an unpaid invoiceHow to claim an unpaid invoice through the county court, what the fees are, how long it takes, and the part nobody mentions: winning is not the same as being paid.
• Charging interest on a late invoiceUK statutory interest is the Bank of England base rate plus 8% on business debts, with a fixed sum per invoice on top. When you can charge it, when you cannot, and how to work it out.
• Payment terms for a one-person trade businessWhat payment terms to use as a UK sole trader, why they belong on the quote rather than the invoice, and the home-visit cancellation rule most tradespeople miss.
• How to chase an invoice without losing the customerThe wording and timing that get an overdue invoice paid without damaging a customer relationship, plus what to do when the invoice is stuck inside a company.
• When a main contractor will not pay youThe Construction Act gives subcontractors payment notices, a right to suspend work and adjudication in 28 days. What it covers, what it does not, and how to use it.
• Retention, and how to actually get it backWhat retention is, the usual 3% to 5% and when each half is released, why subcontractors lose it, and the practical steps that get it paid back to you.
• Stage payments, and how to structure themHow to split a job into stage payments a customer will agree to, what makes a milestone enforceable, and why the money should always be slightly ahead of the work.
• Should you put an unpaid invoice with a debt collection agency?What debt collection agencies charge, when a third-party letter works better than yours, and when a free letter before action does the same job for nothing.
• Writing off an unpaid invoiceWhether you can claim tax relief on a bad debt depends on which accounting basis you use, and most sole traders are now on the one where there is nothing to claim.

All of it, in the order you need it, on the getting paid hub.

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