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What due diligence do you do before opening a line of credit, to your new Buyer/Customer???


Hello All,


I am taking the liberty of starting this discussion to understand from all fellow Rodinhooders as to what due diligence, background check, etc do you do before extending credit to your client?


Also do you simply get enamoured by the biggies in the corporate world who have huge consumers and are extremely delayed pay masters?


We all have this feeling that our money is safe and it will come out eventually, delays are just part of the business today, but is this feeling backed by any data or research?


I will first like to state as to why did this question come to my mind… 


I got an order from this company in DERA BASSI, PUNJAB for about 2.5 MT of oil valued at around 5,00,000/-. 


Things that we could do and we did:-












All was fine, we processed the order, the vehicle was up for loading, and we received the security cheque PDC and an email mentioning the UTR number of the remittance of the advance payment. All was going just fine till I receive a CALL! So this man happened to be the company’s purchase officer, he upraised me of the following and urged me not to supply:-


1) Cheque received by us is from an account which was closed long back, so if you were wondering that the Negotiable Instruments ACT of 1938 will come to your rescue, think again. The signature is bogus and icing on the cake, an FIR was registered by the owner of the company long back that his cheque book was stolen, so if we press charges, it’s us who go to jail. 




3) What about the UTR number of the advance payment: – That was genuine, only to learn that I was not getting the money, the UTR number was against a payment received by them and not sent by them. 


I was totally speechless and did not know what to do, so first I stopped the vehicle from leaving my premises and then I played the waiting game, because the owner of that company was expecting the goods to be delivered to him, when they did not turn up, he did the expected – he called me!!. 


On learning that I knew that his VAT number was fake, guess what… his number goes off the radar and he never called me again….! 


MORAL OF THE STORY: – This event really enlightened me that I actually took all necessary precautions which one would generally take and still they were not full-proof and 90% of today’s business is working on trust and blind trust. 


Banks, NBFC, etc have CIBIL to know your actual financial situation, but Banks are just 1 of the pillars for capital infusion, SUNDRY CREDITORS also account for majority of the working capital needs of the firms to grow their business. 


So if anyone has to do a VIJAY MALLYA on you… He will first default or extend/indefinitely delay VENDOR PAYMENTS, then he will default of Wages and Salaries, stop paying ESI and PF. Then they will delay the tax payments and lastly they will dare to default on Bank Interest and Loan repayments. Yes that’s the last nail in the coffin, which exposes them of the financial crisis, but the sad part being neither does the bank nor the shareholder, nor VENDORS, etc are aware of anything that’s happening till the bank default happens. 


Hence it will not be wrong to say that “If the turn cycle of SUNDRY CREDITORS is made available, it is a very good indicator of the highlighting plausible future loss or insolvency of the company.”


I devised a way of addressing this issue; no I don’t plan to pull off a REDBUS brainwave, but want to give it a fair try only to find a solution for myself and all fellow business owners.


Would appreciate your comments, insights following which I shall share my IDEA on the FORUM for your valuable suggestions, feedback, partnerships, etc  




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  1. I would also do a reputation check on the company/people among peers in the industry, besides all that you did.

  2. “If the turn cycle of SUNDRY CREDITORS is made available, it is a very good indicator of the highlighting plausible future loss or insolvency of the company.”

    Not to mention, if this info were available, it would serve as a valuable pre-sale tool for companies to evaluate their customers because, you would, in effect be determining a credit rating based on this metric. Dreaming further, it could force companies to impose discipline on their payables as their vendors could adjust their credit terms or purchase rates based on average payment performance. 

    Only question in my mind, how to acquire reliable info in this highly secretive area. You have an idea, I’m all ears. 

  3. Some simple kyc checks
    Cheques: please take a cheque for minimal amount let’s say 10 rs and see if it is cleared
    Utr: check with your bank if same has been received.
    Pan card: can be verified online

    There are 3 aspects to a diligence
    1 reference check
    2 look and feel of person and
    3 documantry proof.

    Receivable cycle is a difficult thing to find based on documantry evidence as most balance sheets in country are made backwards. Still if you want to see any balance sheet of a company you can get the same from MCA website. Another method is reference check from local market.

  4. Would Like to add depending on your business size n volume Credit Insurance is the best protection for any business. Secure your debtors. The system follows all due diligence and then advises your company to allow credit to a particular company. Never the less 3 latest transaction/reference checks are also a good way.

    However in the realm of business in this case you are direct owner what happens

    when the same executed by sales team practically no assured way to secure it

    but only do your basic due diligence. Desperate Sales requirement environment

    makes it difficult to control this. Thorough Due Diligence methods can be adopted

    too but the side effect is Good ones will shy away too to a certain extent.

    RISK vs MONEY Supply will be crucial decision.

  5. On a side note … for mid sized firms there are services available to insure your receivables – these guys do a decent background check on you and the customers too …  

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