How to spot signs of customer or supplier insolvency

Despite the total number of corporate insolvencies in Q1 2021 (January to March) decreasing by 22 per cent from Q4 2020, the withdrawal of Government support schemes in the next few months will likely lead to an increase of pressure on struggling businesses.

The knock-on effects of suppliers or customers entering insolvency procedures can be potentially disastrous for any business. If issues are not addressed quickly with a business plan swiftly put into place, customer or supplier insolvency can disrupt supply chains or even grind them to a halt.

You must spot the signs of supplier or customer insolvency as soon as possible to allow you time to readjust, reorganise any source of supply or to understand your options should a key customer go out of business. But, spotting a supplier in financial trouble before it’s too late can be difficult.

We have put together a guide covering how to identify a supplier or customer in financial trouble and what steps you can take to protect your business against such risk.

What are the Warning Signs?

  1. Are you still receiving the exact service you did at the beginning? 
  2. Have you noticed a drop in the quality of products or services/taking longer to deliver? 
  3. Account teams pushing for payment well before your invoice due date?
  4. Is the company selling assets to streamline the business?
  5. Customers requesting an extension to their credit terms
  6. Business accounts being filed late or not at all.
  7. Are they avoiding communication or acting more guarded when you contact them?
  8. Payments from customers are late when previously there was no history of default.
  9. Has the supplier or customer received County Court Judgments (CCJs)?
  10. A high level of employees have been leaving the company.

Any of these signs could signify that your supplier is experiencing issues with their cash flow or other financial difficulties. If you are worried this could be the case; you should look to mitigate reliance on such a company and look for alternate supply contracts.

How to identify a company in financial difficulty?

If you believe you have spotted numerous red flags when working with a supplier or customer, you can check the status of companies registered in the UK via Companies House or search the London Gazette.

If a company is trading and has not entered insolvency proceedings, or has submitted a request that the company be dissolved, the status will show as ‘active’. If the status shows as ‘liquidation’, this signifies the company is undergoing formal insolvency procedures. If it is shown as ‘dissolved’ without prior insolvency it may mean that a company has filed for dissolution. If this action has been taken whilst any liability remains it could be unlawful and open to investigation under recent legislation.

However, just because a company’s status is ‘active’ does not mean the business is free from financial issues or in the early stages of starting insolvency proceedings. The status will only change to ‘liquidation’ if a liquidator has officially been appointed and the process has started formally. 

You can also monitor your suppliers and customers by checking their credit history and asking for references as you would when researching a new supplier. Software programmes such as Red Flag Alert allow you to monitor both existing and potential suppliers and customers. The platform actively notifies any changes to financial positions as and when they happen. 

This information can be helpful when looking to mitigate any potential risks. Once you are aware of any financial struggles, you should take the necessary steps to protect your business, such as putting together a new business strategy to avoid potential cash-flow problems or sourcing an alternative supplier going forwards.

How can we help you?

If you believe your business will be affected by a supplier or customer becoming insolvent, insolvency practitioners can provide a range of business recovery, rescue and strategic planning that will help you turn the situation around and protect your business.

At Poppleton & Appleby, we have a dedicated creditor support team headed up by Stephen Wainwright and Jonathan Molloy. The service removes the hassle and time dealing with paperwork arising from insolvency and or doing credit and background checks on new and existing customers. 

If you or one of your clients feel uneasy about a potential supplier/customer then feel free to speak to either Stephen or Jonathan who will with the software available to them make discreet enquiries on behalf of yourself or your client reporting back usually within 48 hours – this service is FREE of charge.

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