It’s critical to spot early signs that your business customers are struggling or about to go under. Discover nine red flags that will help you pre-empt late or non-payments and avoid negative impacts on your cash flow.
Corporate failures are rising. The latest government figures show 2,029 insolvencies in England and Wales in November 2022 – 21% higher than the same month in 2021 and 35% more than in November 2019.
Our economic insights team predict this rate will trend even higher, with the energy crisis, interest rates shocks and a protracted recession propelling UK insolvency rates to around 27,000 in 2023.
If your company extends credit to customers, monitoring for warning signs and quickly responding can be critical in helping you maintain cash flow and stay liquid.
Nine red flags that indicate a company is going under
- Excuses for non-payment
Common excuses for not paying an invoice include non-receipt, IT problems, disputes and errors, or the person in charge of payments being unavailable due to illness, bereavement, or staff changes. Another sign that all may not be well financially could be a sudden or arbitrary invoice query or dispute – possibly indicating that your contact is stalling for time. Is a customer is avoiding you? It could be a serious sign the company is going under. It also shows they’re treating you unfairly by not keeping you abreast of the situation.
- Payment patterns changing
If a customer starts paying you later or less frequently than usual or makes part-payments, this could indicate cash flow problems. Try to get a clear explanation from them about what’s causing the issues.
- Requests to change credit terms
A customer with urgent financial problems may make sudden or unexpected requests to renegotiate terms or contracts. During renegotiations, try and find out as much as possible about the reasons for the request. If possible, meet them at their premises – a physical visit may reveal other clues about their financial state, such as reduced inventory.
- Changing order behaviour
Ordering less than usual, or changing other buying patterns, could be signs of weakening demand for a product or service and a red flag that the company is going under. Keep communicating with the client and try to maintain a good relationship, so you can better understand the reasons behind changing patterns.
- Reputational damage
Look out for adverse media coverage about your customer and an increase in negative comments from their customers or other business partners. Have any other suppliers experienced the same problems? You could also make subtle enquiries with your contacts in the sector who know that company.
- Structural and strategic changes
Restructures and strategic gear changes can be signs of financial trouble and, potentially, of a company going under. These could involve leadership or management reshuffles; selling off chunks of the business; cutting growth plans; or an unexpected pivot towards new markets and strategies. If investors are forcing changes on the firm, that could indicate they are unhappy with its current trajectory.
- Cutting marketing spend
If a business has run prominent marketing campaigns but then stops, it could be because it can no longer afford them. Conversely, a company might try spending its way out of trouble with a last roll of the dice. Be careful not to jump to conclusions, as many firms will cut budgets and try new markets as a normal part of the business cycle and growth strategy.
- Falling share price
A poor-performing customer stock might indicate that their financial model could be under strain. If traders are shorting the stock—which means betting against a fall—it’s a sign that the customer is in trouble. Read investment analysts’ reports about the company to get a clearer picture of its direction.
- Data signals
There may be signs of impending insolvency in other credit risk data and analysis. Check sources such as financial results, balance sheets, management information, governance information, credit ratings, payment records, and insurance claims. Try to match this data with other signs and symptoms to establish a pattern of increasing financial stress. If the data does not suggest any problems, it may be a false alarm.
How to respond if you can tell a company is going under
Your cash flow relies on customers paying on time, so the ability to detect if a company is going under could be the difference between success and failure in your business.
If you suspect customers are close to bankruptcy, pre-emptive measures you can take include:
- buffering your finances by building cash reserves
- diversifying and reducing credit risk in your client pool
- strengthening your collection and credit control processes
- cancelling or reducing further credit to specific customers
- renegotiating payment terms to retain them long-term
- taking out trade credit insurance to protect against late or non-payment.
Don’t rely on your accounts department to monitor the warning signs. It’s crucial for other functions, such as sales and customer service, to detect if a company is going under too.
If you spot warning signs and patterns, don’t ignore them. Act immediately and start clear and early communications with the customer to ward off any cash flow problems.
Get the best possible understanding of their financial situation to allow you to customise your response. Show sensitivity, and treat them fairly to help maintain your relationship long-term. If you can help a key client stay afloat, it could even avoid an insolvency domino effect in your sector.
Whatever the signs or causes of your customers’ financial pressures, Allianz Trade’s credit insurance can protect you against the impact of late or non-payments, bringing you the ultimate peace of mind.
Advantages of trade credit insurance
Allianz Trade doesn’t just protect against the impact of overdue payments – there are many more benefits of our trade credit insurance. For example, we also provide risk assessment services—including partnership, support, expert knowledge and data from proprietary intelligence networks—to help you manage customer risks. We offer insights that help you avoid bad debts in future and make data-informed decisions about extending credit to clients.
It can be hard to spot red flags if your information is limited to credit reports and first-hand experience. Allianz Trade’s credit insurance offers more comprehensive risk profiling based on multiple sources, including what other companies working with your customers are reporting.
Our trade credit insurance gives you critical peace of mind in tricky trading environments. Our extra support can help you keep trading, no matter the circumstances – and help you reduce costs, attract more funding, and grow your business.