Before you fund: what a prospect survey tells you

A new client looks best on the day it applies. The application is careful, the management accounts are current, and the aged debtors report is printed fresh. The prospect survey is the first time someone independent looks behind the application at the business that will produce the ledger you fund.

What a credit report can’t answer

Credit reports, filed accounts and bank references tell you about the company’s history: whether it pays, whether it files on time, and what its balance sheet looked like at the last year end. They are essential, and they don’t answer the questions a receivables financier most needs answered:

• Are the debts on the ledger real, and will the customers pay them to you?
• Can the business produce accurate reporting every month?
• Does the paperwork exist to prove a debt if a customer disputes it?
• Is there anything about how it trades that makes the ledger harder to collect?

A survey answers those.

Systems

How does an order become an invoice, and an invoice become cash? The surveyor follows that path through the business: who takes orders, how deliveries are recorded, when invoices are raised, and how payments are matched. Weak points here become reporting problems later. An invoice raised from an order rather than a delivery note is a pre-invoicing risk built into the process.

The accounting system matters too. Can it produce an aged debtors report that agrees to the ledger, and can it age by both invoice date and due date? A business that keeps its sales ledger in a spreadsheet will need watching more closely than one on a mainstream package.

The ledger

The surveyor reads the ledger the way an auditor will:

• concentration in a few customers;
• balances that are old or stuck;
• credit notes and their timing;
• customers who are also suppliers (contras);
• customers connected to the business.

A sample of invoices is tested against orders and delivery notes, so you know before funding whether the paperwork exists.

Look out for terms and arrangements that make debts harder to collect. These include sale or return, retentions, stage payments, consignment stock, and goods supplied under contracts that let the customer set off claims. None of these needs to stop a facility. Each changes what can safely be funded.

The survey is the cheapest moment to find a problem: before any money has been advanced against it.

Financial strength

The surveyor reviews the latest management and filed accounts, any arrears with HMRC, and the bank statements. Is the business profitable? Is it running out of cash? Is it growing faster than its working capital can support? Growth is often why a business wants invoice finance, and it is also why some fail.

The people

Who runs the business, who runs the ledger, and how well do they understand what a facility will ask of them? A finance team that can explain its own aged debtors report clearly is a good sign. One that can’t, or that depends on one person, is a risk to monthly reporting.

On-site or remote

An on-site survey adds what you can only see in person: the premises, the stock, the people at work, and whether the business is what the application described. A remote survey covers the documents and the conversations and costs less. For a larger or more complex prospect, or one in a trade you know less well, visit.

Questions worth asking the prospect

1. Which customers make up most of the ledger, and how long have you traded with each?
2. Do any customers also supply you, or share directors or owners with you?
3. Are any sales made on sale or return, on consignment, or under contracts with retentions?
4. Who prepares the aged debtors report, and how does it agree to the accounts?
5. Do you owe HMRC anything beyond the current period, and is there a time-to-pay arrangement?
6. Why are you moving to invoice finance now, and what is the cash for?

The answers matter, and so does how readily they come. A prospect that answers plainly and shows the documents is likely to report the same way once funded.

What to do with the survey

Use it to set the facility, not just to approve it. The findings should shape:

• the prepayment percentage and any concentration limits;
• which debts are excluded, such as contras, connected customers or long-dated items;
• what reporting you ask for, and how often;
• when the first audit falls, and which kind.

A survey that finds nothing wrong still earns its fee. It gives the first audit a baseline, so that you can see what has changed. It also tells the client, from the start, what kind of reporting and evidence you will expect.