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How do I know if a supplier or customer is experiencing financial difficulty or is insolvent

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How do I know if a supplier or customer is experiencing financial difficulty or is insolvent

Reviewed: 4th February 2019

Whether they supply you with your raw materials, finished products, or provide transport or delivery services, having a supplier go bust isn’t something any business owner would wish to happen. The knock-on effects of this on your own business can be potentially disastrous. Your production or distribution channels could be severely disrupted or even grind to a halt if these issues are not addressed and a plan swiftly put into place.

Spotting the signs of a supplier in financial difficulty early on allows you time to readjust and reorganise your sources of supply, or to better understand your options should a key customer go out of business. The knock-on effect when you lose a business connection like this can be significant, particularly if a principal supplier or key customer is involved. The problem, however, is that it can be difficult to know that a supplier is in trouble before it is too late.

Here are a few things that can help you be on the lookout for a supplier in financial trouble and steps you can take to protect your business against this risk:

1.      Look for the warning signs – There are often warning signs that a company is experiencing financial difficulties, and the earlier these are spotted the better. Is the service they are providing you as good as it used to be? Are they taking longer to deliver goods to you, or have you noticed a dip in the quality of what they are supplying? Perhaps they are pushing you to make payment well before the invoice due date.

These could be signs that they could be experiencing a certain level of financial discomfort or issues with their cash flow. If you suspect this is the case you should look to take steps to mitigate your exposure and reliance on this company to provide you with the services or goods which are vital to the operations of your own business.

2.      Check their status with Companies House – The Companies House website allows you to search for any registered limited company in the UK. Among a raft of other information, this will tell you the current status of the company.

If the company is trading and has not entered a liquidation procedure, or has submitted a request that the company be struck off, then the status will show as ‘active’. Alternatives which you should take note of are ‘dissolved’ which means the company has already been closed, or ‘liquidation’ which signifies that the company is currently undergoing a formal insolvency procedure.

Although this is a good guide, this method is not without fault. A company’s status will only change to ‘liquidation’ once a liquidator has been appointed and the process officially started. Just because a company is ‘active’ does not mean it is free from issues or in the early stages of commencing insolvency proceedings.

3.      Monitor your suppliers – It is likely that before signing up with a new supplier you would do your research by checking their credit history and asking for references. However, doing your due diligence is just as important when it comes to your current suppliers.

Software programmes such as Red Flag Alert give you the capability to monitor your suppliers and customers, both existing and potential, and be notified of any changes to their organisational structure or financial position as and when they happen. This information can be extremely useful in helping you mitigate the risks caused by suppliers going bust or falling into insolvency. Once you are aware a supplier is in difficulty you can take the necessary steps to protect yourself and your business by limiting your financial exposure to this company and sourcing an alternative supplier going forwards.

Other warning signs include:

  • Avoiding your communications, or acting more guarded when you contact them
  • Payments are made late when previously there was no history of default
  • The company is not expanding as you would expect – maybe they are using old technology, or selling assets with a view to streamlining the business
  • Customers are requesting an extension to their credit terms
  • County Court Judgments have been made against the supplier or customer
  • Company accounts have been filed late or not at all
  • Directors or other high-level members of staff are resigning

If you fear your supplier is experiencing financial difficulties, you need to take action as a matter of urgency. If you have already paid for goods and your supplier subsequently goes into liquidation, you should be prepared for the possibility that you may never receive these goods or services you have paid for. If this happens, you need to take stock of what that means for the viability of your own company. Ideally you will be in a position where you can move on from any money lost to an insolvent supplier and continue trading, however, depending on the level of financial exposure you had to this company, their liquidation may put your own business at risk.

Dealing with credit risk

Offering credit to your customers comes with an inherent risk which cannot be fully protected against; however, this risk can be mitigated with a strong credit management policy. Performing credit checks on your customers, not only at the beginning of your business relationship, but at regular intervals during, help to keep abreast of any noticeable decline.

Other useful policies when dealing with credit risk include presenting clear terms of trade in all of your contracts. In this regard, terms and conditions might include:

  • Your right to charge interest on overdue payments
  • The fact that ownership of goods only transfers to the customer once final payment has been received
  • The obligation for customers to contact you immediately with any invoice queries or problems, rather than waiting until the payment is due

If your company, and its ability to continue trading, is threatened by a supplier becoming insolvent, you need to take swift action to remedy the situation. There are a range of business rescue, recovery, and restructuring options out there and the sooner you seek expert advice, the more of these will be open to you. Real Business Rescue will talk you through these options and suggest the most appropriate one for you and your business. Call us today to arrange a free no-obligation consultation with one of our insolvency experts

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