Spotting the early signs of financial distress in your customers
Understanding the financial health of your customers is critical to protecting your business from potential payment defaults
In late October 2023, the multi-sports retailers, Wiggle and its sister brand Chain Reaction, went into administration, owing unsecured suppliers £26.7 million.
Other recent notable failures include the well-known retailer, Wilko, leaving a significant number of suppliers with outstanding debts, according to Deloitte; the DIY and garden retailer, Homebase; Lloyds Pharmacy, ISG Construction, Debenhams and Café Rouge, to name but a few.
These cases – and there are many more - highlight the financial fallout that can result from a company’s collapse, especially for suppliers who may not have been protected by Trade Credit Insurance. This important cover is designed to protect businesses against the risk of customers failing to pay, and can help mitigate losses for businesses who may be owed money by a company that has gone into administration.
Understanding the financial health of your customers is critical to protecting your business from potential payment defaults. But do you know how to spot the early signs of financial distress before it impacts your bottom line? By staying vigilant and proactive, you can identify the warning signs that a customer may be at risk of defaulting on payments, safeguard your business and take timely action to mitigate risk.
Typical warning signs
- Changes in payment behaviour - Late or inconsistent payments can be a red flag: if a customer who typically pays on time starts delaying payments, it may indicate cash flow issues.
- Request for extended credit terms - When a customer asks for longer payment terms or an increase in their credit limit, it could signal underlying financial difficulties.
- Negative news and industry trends - Keep an eye on news and industry reports related to your customers: adverse press or declining industry performance can be indicators of impending financial challenges.
- Deteriorating financial statements - Regularly reviewing your customers’ financial statements can help you spot declining revenue, increasing debt, or shrinking margins, all potential signs of distress.
- Unusual communication patterns - A sudden change in the frequency or tone of communication from a customer may suggest they are facing financial pressure and trying to avoid discussing payment issues.
Role of Trade Credit Insurance
Don’t wait until it’s too late. By identifying these early warning signs, you can take steps to protect your business from the impact of customer insolvency.