Circumstances change, and a business that is flying one month may be plunging into debt the next. Sadly, one big customer going bust can disrupt an entire cash flow of a smaller business, that's why it's imperative to keep your eyes peeled for any warning signs of a company in financial distress.
The best way to monitor your customers is by monitoring their company credit report. A company credit report is packed with key financials, director details, adverse information plus key details of a company. Most things on a company credit report are there to analyse a company’s performance, but these are the key features we suggest you monitor.
What to monitor on a company credit report:
1. Has the company credit score dropped?
An algorithm takes all the factors of a company credit report into account and awards a company credit score to the company for potential clients/suppliers to see the likelihood of that business failing. If a company credit score drops, there would be an indicator somewhere on the report that something within this business has declined. Creditsafe’s company credit reports give a breakdown of why the scores go up or down, so you will be able to find out the reason in our commentary.
2. Has its recommended credit limit decreased?
A company credit limit is the total recommended amount of credit outstanding at any one time. There is also a ‘contract limit' which is the maximum recommended contract capacity over 12 months. This is a guideline to how much businesses should offer to this company in terms of credit, products or services. If this drops, it could be a warning sign that the company cannot take on a certain amount of credit, which could indicate they are struggling to pay their bills. By paying attention to the recommendations you are ensuring you aren’t offering more than your customers can afford to pay for.
3. Is the company getting slower at paying its bills?
Trade payment data shows how well a company pays its invoices, shared by companies who are part of our trade payment data programme and have first-hand experience with payment behaviour. If the company is in financial distress; their payment behaviour is usually one of the biggest signs of decline. If they are struggling within the business, usually, paying their bills will be affected. The data will show how many invoices have been paid within terms, been paid late or are still outstanding. It will also give you an average Days Beyond Terms (DBT) score, this is how many days beyond invoice terms a company pays their bills on average, allowing you to adjust your payment terms adequately. Read our blog on how to set your payment terms to get paid faster.
4. Has the company got a history of director changes?
A high turnover of staff at top level can indicate internal struggles at a company. For example, if a new director is appointed regularly it could suggest there are either problems within the business or there are disagreements from the top level. This could filter down and cause problems with staff, affecting workflow and ultimately, damaging the business. Keep an eye on directors and appointment dates, also take note if any of the directors have any previously failed businesses, it could be an indicator of how they conduct business.
Always carry out due diligence on directors of businesses you are dealing with; our guide to searching for a company director can give you the best tips on how to do so.
5. How stable are the companies it is linked to?
If your client or supplier is part of a Group Structure, always check how stable the other companies they are connected to are. It’s quite common for businesses within a chain, large group or businesses ran by the same director to move profits around to support each other. However like many foundations, if one link breaks you risk the whole thing collapsing. A business failing within a company’s group structure can then have a domino effect on the company you deal with if the failed company has debts to pay off. Always be aware of how companies linked to the one you’re dealing with is performing.
6. Enquiries trend
Another good feature to look out for on a company credit report is the enquiries trend. Here you will be able to see how often a company credit report has been viewed. If other customers or suppliers of the business are worried about their financial situation, they will be checking their report. If you see a spike in views or a high volume continuously, there may be something going on at the company that you’re unaware of.