Circumstances change constantly: a company that is booming one month can find itself in debt the next. One big customer going bankrupt can completely disrupt the cash flow of a smaller company.
It is therefore necessary to keep your eyes open for all the warning signs of a company in financial distress. The best way to keep an eye on your customers is to check their company credit report.
A company credit report is full of important financial information, director data, negative information and other important company data. Most of the elements in a company credit report are there to analyse the performance, the stability and the resilience of a company.
We would like to list the elements that you should pay extra attention to:
1. Has the company's credit score dropped?
A company credit scorecard algorithm takes into account all factors of a company's credit report and assigns a score to a company in this way. Thus, the credit score of potential customers/suppliers tells you the probability that a company will go bankrupt in the next 12 months.
If a company credit score drops, then somewhere on the report is an indicator that something within that company has declined. Creditsafe's company credit reports give you a breakdown of why the score is going up or down, so you can easily pinpoint the reason in our comments section.
2. Has the recommended company credit limit dropped?
A company credit limit, if you work 'on credit' (= payment afterwards) with your professional business relations, is the total recommended credit amount that can be outstanding at any given time.
This is a good indicator for businesses. If this amount drops, it can be a warning sign that the company cannot take up a certain amount of credit, which can indicate that the company is having trouble paying its invoices.
By paying attention to this indicator, you can ensure that you can deal up to a recommended limit.
3. Is the company paying its invoices more slowly and beyond terms?
Trade payment data or the payment experience shows how well and how consistent a company pays its invoices. At Creditsafe, these are shared by companies that are part of our Trade Payment Data program.
If the company is in financial difficulty, their payment behaviour is usually one of the biggest signals of a downward trend. If they are struggling within the company, this will usually manifest itself in a delay of their payments and even beyond terms.
The data will show you how many invoices were paid within the agreed terms, were paid late or are still outstanding. It will also give you an average 'Days Beyond Terms' or 'DBT score'. This is the average number of days an invoice of a company is still due, after the invoice deadline, until the invoices are paid. The 'DBT' thus helps you to adequately adjust your payment terms per customer or credit risk category.
4. Does the company have a reputation or history of director changes?
A high turnover of personnel at top level can indicate internal difficulties within a company.
For example, if a new director is appointed regularly, this may indicate that there are problems within the company or that there are differences of opinion at the highest level. This may lead to problems with staff, disrupting workflows and ultimately harming the company.
Be alert for directors and their terms of appointment. Also note that if one of the directors has a previously bankrupt company, this can be an important indicator of how they do business.
Always conduct a due diligence check on directors of companies you are dealing with. Through our platform, you can easily investigate the various directors (and their background), as well as whether they are political exposed (= PEP) and whether they are involved in fraud, money laundering and the financing of terrorism.
5. How sustainable are the companies to which they are linked?
If your customer or supplier is part of a group structure, always check how strong the other companies are within this composition.
It is very common for companies within a chain, a large group or companies run by the same director(s) to shift their profits to support each other.
But as with many organisations, if one link breaks, the whole thing risks collapsing like a house of cards. A company that fails within the group structure can have a domino effect on the company with which you do business. If a parent company is in bad shape, this has negative consequences for the subsidiaries. Think for example of 'Thomas Cook'.
Make it therefore a habit to check the companies within a group structure as well.