A single unreliable supplier can freeze production, deplete cash reserves and damage a company’s reputation with its own customers.
Many SME owners in Nigeria and across Africa rely on referrals or the lowest quoted price when selecting vendors. This approach creates significant operational risk.
When a vendor fails to deliver or disappears after receiving a deposit, the cost is rarely just the lost money. The true cost is the lost revenue from unfulfilled orders and the time spent finding a replacement under pressure.
Legal and regulatory verification
The first step is confirming that the vendor is a legal entity. Dealing with unregistered businesses makes it nearly impossible to seek legal recourse during a dispute.
- CAC registration: Request a copy of the Certificate of Incorporation or registration documents from the Corporate Affairs Commission (CAC) or equivalent national regulator.
- Tax compliance: Verify the Tax Identification Number (TIN). A vendor that cannot provide basic tax documentation may pose a regulatory risk to your own business.
- Industry licenses: Check for specific permits required for their trade, such as NAFDAC for food and drugs or relevant engineering certifications.
A common mistake is accepting a business name on a bank account without verifying if that name matches the registered entity on the contract.
Operational and financial capacity
Price is often a distraction from capacity. A vendor may offer the lowest rate because they lack the infrastructure to scale or are struggling with their own cash flow.
- Facility inspection: Visit the vendor’s warehouse or office. This confirms they actually possess the equipment and staff they claim to have.
- Production timelines: Ask for a detailed lead-time schedule. Compare this against their current client load to ensure they are not overcapacity.
- Payment terms: Be cautious of vendors demanding 100 percent upfront payment for new relationships. This often indicates a liquidity crisis.
For example, a Lagos-based furniture maker who relies on a single timber supplier without a backup is one supplier failure away from a total shutdown.
Performance and reputation checks
Referrals are useful but biased. A vendor might provide three happy clients while hiding ten disgruntled ones.
- Unsolicited references: Ask the vendor for a list of clients, but also try to find others in the same industry who have used them.
- Case studies: Request evidence of projects similar in scale to your requirements. A vendor that handles small orders may struggle with a sudden increase in volume.
- Conflict resolution history: Ask how they handled a previous failure or delay. A vendor that blames everyone but themselves is a red flag.
Ignoring these signs for the sake of a lower price usually results in higher costs later through delays, poor quality or complete project failure.
Poor due diligence directly affects cash flow by locking working capital into deposits for goods that may never arrive.
SME owners should identify their top three most critical vendors today and request updated CAC and tax documents to ensure the supply chain remains resilient.
