Are you worried about your customers defaulting in payments? Vendors defaulting in fulfilling their terms after you pay advance to them? Are you capturing all relevant details before you deal with any party?

Business entities often do not ver0ify the background or creditability of their customers/ vendors before initiating transactions with them.

However, they may find irregularities, non-compliance or defaults from few of their customers/ vendors subsequently. As a result, lot of time and resources are wasted to resolve them and at times, entities also end up incurring huge financial loss.

To overcome the above scenarios, each Business should have a practice of having preliminary checks for on boarding new vendors and new customers. This practice not only helps to verify the identity but also to check the creditability of the entities. Many big cooperates follow this practice as their standard procedure to deal with them. Following this process may not give you 100% assurance, but can minimize the risk significantly.

By this article, we will try to explain:

1. List of Preliminary Checks to on-board new customers and new vendors

2. Benefits and Importance of Preliminary Checks.

List of Preliminary Checks which can carried out:

1. For on boarding new Customers:

> Check Financial Details:

    • Creditors Turnover Ratio – To understand in how many days a particular company pays off to its suppliers
    • Financial Creditability – To understand the financial health of the entity and their outstanding liabilities in order to define Credit Limit.

> Check ROC details for Corporates:

    • ROC Annual Filing – To understand how compliant the company is. Since non-filing of certain forms leads to strike off and closure of a company
    • Any Charges on Asset – To understand in case there are any undisclosed debts which are secured against the assets of the company

> Back-ground Checks:

    • 3rd Party Verification – Discuss with the other vendors who have already dealt with the prospective customer
    • Goodwill of company – Reading reports/ articles about the company

> KYC Details: Document MSME Certificate, GST Certificate, PAN, TAN etc. for record purpose

> Declaration: To ensure, no criminal cases were filed/are open against the prospective buyer.

2. For on boarding new Vendors:

> Check status of GST Filing: With the help of GST Certificate, vendor’s GST filings can be checked to ensure the frequency of GST filings & thus timely passing of  GST credit on GST portal is ensured

> Check status of Income Tax Filing: With the help of PAN, it can be checked whether they are compliant with Income Tax & TDS returns or not. TDS needs to be deducted at higher rate if there are irregularities in income tax filing

> Back-ground Checks:

    • 3rd Party Verification – Discuss with the other Clients who have already dealt with the prospective vendor
    • Goodwill of company – Reading reports/ articles about the company

> Check MSME status: It is mandatory for Companies to comply with the MSME reporting norms. Interest liability can be incurred if payment is made after 45 days from the bill date to MSME vendors.

> KYC Details: Document GST Certificate, PAN, TAN etc. for record purpose

> Declaration:

    • To ensure, no criminal cases were filed/are open against your prospective buyer.
    • Declaration that no default has been made in previous period w.r.t. deposit of GST Credit in timely manner. For future periods, in case of any default, vendor will be liable for all related penalty & Interest.

Benefits and Importance of Preliminary Checks:

> Better Cash-flow planning: This activity will help to check the creditability of our Customers and their payment cycle. Thus, it will help to take informed decisions which will further affect our cash flow.

> Minimize risk of default/ fraud: It will help to identify & manage the risks in a well-judged manner. It limits the fraud that results mainly due to hiding of identity.

> Maintain master data: It helps to document various legal documents of our business partners. Entities should periodically update the master data of their customers/ vendors.

> Comply with statutory compliances: It helps in filing TDS, MSME and many other statutory compliances.

Conclusion:

As a standard procedure, each entity should collate all the details & evaluate their prospective business partner with the help of template/ checklist filled before initiating any transactions. Also, for existing Customers & Vendors they should perform this exercise once a year & update the database.

The extent of the checks may vary depending on the nature & materiality of transactions to be performed with a specific Vendor or Customer.

Authors:

CA Prashant Taparia | Partner | [email protected]

Meet Faria | Associate Consultant | [email protected]

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