Losing a client to insolvency is always challenging.
Lost revenue can impact business projections, leading to staff cuts, loss of profits, and curtailed growth. However, the threat is even more significant if you invoice your customers or have extended credit to them.
If a customer declares insolvency and owes your company money, you may not recover the debt. As a result, your company will need to account for the loss as bad debt.
It's important to understand that companies facing such losses due to customer insolvency are at a significantly higher risk of insolvency within a year.
The number of company insolvencies in the UK reached a 30-year high in 2023, and the rise is expected to continue in 2024.
The UK has experienced an increase in insolvencies, surpassing pre-pandemic levels. A significant 9% rise is expected in 2024, which is concerning given the ongoing challenges businesses face, including high operating costs, increased borrowing costs, and economic uncertainty.
The main sectors affected include construction, retail, and hospitality.
The five industries that experienced the highest number of insolvencies in the 12 months from September 2023 to August 2024 compared with September 2022 to August 2023:
One effective tool for monitoring the financial health of your partners is using business credit scores. Here are some key warning signs to look out for and tips on using company credit reports to assess the financial stability of the companies you are doing business with.
Understanding the warning signs of a company in financial distress can help you make informed decisions and protect your business from potential losses.
Late Payments
If a company consistently pays its invoices late, this could indicate cash flow problems. Monitoring your business partners' payment patterns is crucial. Late payments can affect your cash flow and may signal financial instability in your partners.
CoCredo’s top tip: Analyse Financial Statements
If possible, review the financial statements of your business partners. Look for warning signs, such as declining revenues, increasing debt levels, and reduced profitability. These financial metrics provide deeper insights into the company's health beyond credit scores.
Deteriorating Business Credit Scores
A declining business credit score is a strong indicator of financial distress. Regularly check the credit scores of the companies you are working with. A significant drop in their score may suggest they need help meeting their financial obligations.
CoCredo’s top tip: Regular Credit Checks
Incorporate regular company credit checks into your business processes to monitor the financial health of your suppliers or partners. This can help you assess the creditworthiness of the companies you deal with.
Increased Credit Utilisation
High dependence on using credit, particularly if it increases suddenly, may indicate that a company heavily relies on credit to finance operations, which could be a sign of struggling with cash flow.
CoCredo’s top tip: Focus on Profitability and Growth
Increased revenue can reduce dependency on credit over time. Aim to increase profitability and reinvest earnings rather than increase credit usage.
Lack of Manager or Owner Communication
Frequent changes in management or ownership can indicate underlying issues within a company, and becoming unresponsive or evasive could signal potential financial difficulties. Consistent communication plays a crucial role in nurturing a strong business relationship, and it is highly recommended that any significant changes be addressed promptly.
CoCredo’s top tip: Evaluate Credit Limits
Adjust the credit terms and limits you offer based on a company's credit score and financial stability. Offering flexible terms to financially stable companies can strengthen your relationship while tightening terms for those showing signs of distress can protect your interests and cash flow.
Legal Actions and Judgments
Keep an eye out for any legal actions, judgments, or bankruptcy filings against the companies you work with, giving clear indicators of financial trouble.
CoCredo’s top tip: Set Alerts for Changes
Request company credit monitoring alerts to notify you of any significant changes in a company’s credit score. Setting up these alerts can provide early warnings of potential issues, allowing you to take proactive measures.
Declining Market Position
A decrease in market share or sales can be a warning sign of financial instability. Regularly assess your partners' competitive position and industry reputation to ensure they are maintaining a healthy market presence.
CoCredo top tip: Monitor Credit Score Regularly
Monitor your credit score frequently to address potential issues early. This awareness allows you to tackle changes before they affect your lending options. Request your free trial business credit report today!
Experiencing bad debt triples the risk of company insolvency within 12 months. When a client's financial situation worsens, it is imperative to take swift action!
Accessing and utilising business credit reports on your suppliers is a proactive step that can help you spot insolvency warning signs and perform reliable credit checks. By carefully assessing your customers' financial health, diversifying your supplier base, and negotiating favourable terms, you can build a robust supply chain that supports your business's growth and stability.
Taking these steps protects your business and positions you for long-term success in a competitive market.
For over twenty years, CoCredo has offered extensive UK, Ireland, and International credit checks and reports as well as business credit monitoring services. Our invaluable data allows you to safeguard your business effectively from potential financial risks.
Why not take advantage of a free company credit report? Contact us at 01494 790600 or email us for more information on our business credit check service that will reduce your credit risk and boost your cash flow and productivity.
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