Every customer’s a good customer, right? Wrong. There are some customers you should avoid at all costs.

It can be hard – particularly when you're starting out or when business is slow – to turn away a customer.

But there are some customers that put your time, money – and a whole lot more – at risk.

Here are five warning signs to watch out for, in initial business dealings.

1. Bad credit history

If a potential customer has a history of late payment or non-payment of creditors, chances are that you'll soon find yourself out-of-pocket too.

There are a number of ways you can quickly and easily check a potential customer's creditworthiness, starting by asking peers within your industry what their experience with the client has been – it's a small world after all.

You can also ask the client for trade credit references and obtain business and personal credit reports from agencies such as Equifax,illion Express (formerly Dun & Bradstreet express), CreditorWatch and Experian.

The unfortunate fact of the matter is that if you trade or sell goods on a credit basis you are at risk of bad debt or non-payment by customers that can significantly disrupt your cash flow and leave you out of pocket.

That’s why trade credit insurance is great  to help protect your income and business assets against potential customer insolvency .

“Any contracted items that are not fulfilled by a customer can hit your business hard, especially if it is an unexpected disruption”

2. Verbal agreement

Beware of customers that are keen to do a 'handshake deal'.

As we've previously discussed, if you have a verbal agreement in place and a dispute arises, it can be very difficult to prove the terms of the agreement.

This can lead to a he-said she-said dispute and quite the legal bill. Business.gov.au has this handy guide to drafting a contract, with key clauses that include:

  • details of the parties to, and the duration of, the contract
  • key deliverables
  • payment details and dates, including late payment provisions
  • required insurance and indemnity provisions
  • termination conditions

A lot of businesses can deal with contract ambiguities with customers by having standard terms of trade.

3. Poor communication or making excuses

Sorry, our email has been playing up”. “We're restructuring”. “We're changing bankers”. “The product wasn't up to scratch”. “The dog ate the cheque” …

If a customer is making excuses for late payments or failing to get back to you promptly, you may not be dealing with a good long-term customer.

For some tips on asserting yourself and giving them a chance to prove themselves – consider this Business.tas.gov.au checklist.

Any contracted items  that are not fulfilled by a customer can hit your business hard, especially if it is an unexpected disruption.

4. Payment irregularities

Even if you do receive payment, the manner in which you're paid may provide hints that a customer's business is struggling.

Some of the signs of deterioration in a customer's business can include:

  • failure to meet credit terms previously agreed and adhered to
  • slow account payments
  • asking for more favourable credit terms
  • dishonoured cheques
  • only making payments when reordering
  • disagreements over invoices resulting in short payments
  • post-dated cheques
  • delays in sending out accounts

5. Difficult customers

Sometimes you just have to put a customer in the 'too-hard-basket'.

Some customers constantly complain, some are always demanding a discount, while others unnecessarily request you to redo jobs that were perfectly fine the first time around.

If you're spending too much of your time trying to please one customer, there's a good chance you'll neglect a large chunk of your already satisfied customer base.

That said, it's important you part ways with your customer on good terms (remember what we said about it being a small world?) and don't breach any anti-discrimination laws

Protecting your business

No matter how good you are at reading the signs, sometimes a bad customer gets through and you're left footing the bill or fighting a legal battle.  That's when good business insurance pays off .

Public liability insurance can help protect your legal liability to third parties, including clients, customers and the public for injury or damage to their property, caused by the business.

While, product liability insurance can help cover you against the cost of investigating and defending your business against a claim made against you and your product.

To discuss the best ways insurance can protect your business from bad customers, reach out to your local Steadfast Broker

Important notice - Steadfast Group Limited ABN 98 073 659 677 and Steadfast Network Brokers

This article provides information rather than financial product or other advice. The content of this article, including any information contained in it, has been prepared without taking into account your objectives, financial situation or needs. You should consider the appropriateness of the information, taking these matters into account, before you act on any information. In particular, you should review the product disclosure statement for any product that the information relates to it before acquiring the product.  

Information is current as at the date the article is written as specified within it but is subject to change. Steadfast Group Ltd and Steadfast Network Brokers make no representation as to the accuracy or completeness of the information. Various third parties have contributed to the production of this content. All information is subject to copyright and may not be reproduced without the prior written consent of Steadfast Group Limited.