Credit & Risk

6 tell tale signs a company is in financial distress

4 Mins

Financial distress is becoming a common term in today’s media. Concerning headlines regarding Retail giants failing are a sore reminder of how fragile our economy really is.

On average, 94 companies become insolvent every single day in the UK; leaving behind unpaid bills, unemployment and disrupted supplier lines. Unfortunately, it’s not just high street brands; the problem ripples out across all industries, albeit some are higher risk than others. The reality is that if one company fails, it will have a knock-on effect for companies that they trade with regularly.

B2B businesses are tightening up on due diligence measures and regulatory checks when it comes to commercial trading, but many are failing to monitor their customers and suppliers regularly after they have started to work with them. 

Chapter 1

Spotting the warning signs

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. 

Chapter 1

Day to day warning signs

Financial Distress

Sometimes, there will be no warning signs of a company in financial distress, at least on paper; but more often than not the day-to-day dealings with a business will show tell-tale signs of decline, you just need to know how to spot them. 

Here are our top tips of what to look out for: 


• A change in communication 

If your regular relationship with a client or supplier changes, there may be a reason. For example, if you are in regular contact with them and they start ignoring your emails, this could be a red flag that something isn’t quite right. They could be ignoring your emails in case you’re chasing for payment, or asking for resources they don’t have because of cash flow problems.

On the other hand, if they are emailing you continuously and trying to upsell you, they may be desperate for new business to pick things up. Be vigilant to any changes in your relationship as these could be warning signs of trouble ahead. 


• Difficulty with speaking to someone 

Fraudulent businesses and even businesses that were once legit but are struggling will sometimes try and run from unpaid bills. If your emails are bouncing back or the line goes dead when you try to phone, this would require quick action on your part. Check the company's website is still up, and visit their office where possible to see if it is still operating. If you cannot get hold of anyone within the business and you have an invoice outstanding with them, it may be time to take legal action


• Delays on payments 

Unfortunately, delays on payments are all too common so it’s sometimes hard to say this is a sign of a business in financial distress. But if you have had no problem with payments from a customer before and suddenly they are avoiding your calls and emails when you’re chasing payment, this would be a noticeable problem. Ensure you stay in regular contact with your customers throughout their contract with you so you can monitor for any changes. 


• Accounting or invoice problems 

If you’ve sent an invoice to your customer and they respond with an excuse they have accounting problems, this could be a warning sign they are struggling to pay their bills. Common excuses include they have changed bank accounts, they have to verify details with a bank, or their accountant is off sick. Another common excuse could be problems with the invoice. They could give you the wrong address, the wrong account holder name, etc. This will slow down the invoice process and will mean going back and forth to correct it before the invoice can be paid. All these warning signs are something to be aware of, read our blog on chasing late payments for further advice. 


Unfortunately, you can’t live in your clients’ pockets and know the ins and outs of their business back to front. The best you can do is monitor them to the best of your ability, both on and off paper. If you are dealing with a company that's in financial distress and are chasing payment from them, read our debt recovery guide that was designed to aid you get your invoices paid. 

Creditsafe’s monitoring tool allows you to follow your complete portfolio on a daily basis without manually checking them individually. Our system will monitor your customers and suppliers in the background and alert you by emails if anything changes on their company credit reports. 

Try our complete system for free today!