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A counterparty is any entity with which you sign a contract. Many small businesses contract with other business providers with no knowledge of their financials, credit worthiness, or whether they actually can perform. Generally, I am amazed by how much business gets conducted with counterparties that fail most reasonable standards. As a small business owner, you need to protect your company and customers before you sign on the dotted line. Here’s how to lower your counterparty risk:
1. Ask questions. You should ask some basic questions of prospective companies with which you plan to do business. Is the company creditworthy? Does it have a clean, auditable background and business reputation?
2. Demand financials. Demand and review the financials of any prospective counterparty.
3. Investigate how information is secured. Look into how the company protects sensitive data and guards against it being stolen or hacked.
4. Check whether the counterparty is a public or private company. If the company is public, it should be subject to Sarbanes-Oxley regulations and compliant with auditing standards. If the company is private, determine whether its financials demonstrate sufficient capital and profitability.
Gathering this information will help you make informed decisions. Know your risks and do business only with counterparties that respect them.
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