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Credit Risk: The tell-tale signs of a customer or supplier in financial distress

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Credit Risk: The tell-tale signs of a customer or supplier in financial distress

Reviewed: 21st February 2018

The impact when a customer or supplier enters insolvency can be catastrophic for connected businesses. This is why it’s crucial to operate your business using robust credit management processes, and to deal with credit risk as effectively as possible.

The recent insolvency of Carillion serves to illustrate the vital importance of assessing and dealing with credit risk in business, and the devastating aftermath when things go wrong. Following Carillion’s collapse, many businesses in the supply chain also became at risk of insolvency, taking their place with other unsecured creditors at the bottom of the payment hierarchy.

So how do you tell if a supplier or customer is experiencing financial distress and what can you do to protect yourself and your business?

Signs of financial hardship

  • Cash flow issues - Has your customer/supplier started paying late, or are they avoiding your calls? This type of change in behaviour suggests they’re experiencing problems, and that you may now be dealing with a company that’s a credit risk.
  • Management resignations - When a number of top-level executives resign over a relatively short period of time, it could be a sign of the company’s poor performance. Lower dividend payments can also indicate that a company has financial problems. 
  • Sudden stock/asset sales - Sales may be held unexpectedly in an attempt to bring in more cash to pay upcoming bills. Additionally, if the company is selling off assets, this might be part of a streamlining exercise to minimise outgoings. 
  • Reduced service levels - If service levels were previously high, missed or late deliveries, or stock shortages, strongly suggest that something is wrong. 
  • Previously rapid business expansion - Maybe your supplier or customer’s business has expanded very quickly over recent months, but over-trading can cause serious problems as businesses struggle to fund the additional requirements of large orders. 
  • High turnover of staff - Staff may be aware of the company’s poor situation and decide to look for other employment, or they may simply be dissatisfied with their employer if the working environment is chaotic or out-of-control. 
  • Late filing of accounts - You can obtain wide-ranging information on limited companies using public registers, such as whether they’ve filed their accounts, how many officers of the company have resigned, and other pieces of information that provide an overall picture of financial health.
  • County Court Judgments (CCJs) - You can also check whether or not your customer or supplier has any County Court Judgments against them. This can be done via the Register of County Court Judgments, which is a public register maintained by the Registry Trust.   

How do you minimise your exposure to bad debt?

There are a number of ways you can reduce the risk of incurring bad debt when a customer or supplier can’t pay:

Invoice finance

Invoice finance is an alternative method of funding your business using the inherent value of your sales ledger. Factoring and invoice discounting both involve receiving 80%-90% of your invoices in advance, typically within 24 hours of issue. The balance is then received when customers have paid in full, minus the financier’s fee. The benefits of this finance include an ongoing, regular source of working capital that increases alongside business growth.

Credit risk profiling

Credit risk profiling platforms such as Red Flag Alert provide vital intelligence on a company’s financial situation, and their likelihood of being a risk to your business. You receive regular information that gives you greater control, and allows you to act quickly to protect your business if necessary.

Trade credit insurance

A credit insurance policy offers protection from the risk of bad debt, and the subsequent adverse effect on your business. Insurers will require you to operate effective credit management procedures, with policies being tailor-made to individual businesses.

Retention of title

If you supply goods to customers, a retention of title clause in your terms and conditions of trade, could help you avoid financial losses if they enter insolvency. To increase the likelihood of success with this option, you should seek professional help in drafting the clause.

Real Business Rescue can provide more information on recognising the signs of financial distress in your customers and suppliers. We can help you control your credit risk by offering tried-and-trusted solutions, and will clearly explain your best options. Our extensive office network comprises 55 offices across the UK with a partner-led service offering immediate director advice.

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