Why Frequent Late Payments Can Be a Strong Indicator of Bankruptcy Risk

Late payments have become the norm in the business world. But what do they say about a company’s cash flow health and payment reliability?

When you have good relationships with your customers, there are certain perks that you get to enjoy. Maybe those contract renewal meetings get a bit more personable, or it becomes easier for them to raise questions or concerns with their orders.

Another benefit that some customers might expect is more understanding when it comes to late payments. But if customers let themselves become too complacent in their repayment schedules, it can have serious and wide-reaching implications for their business: including increasing their bankruptcy risk. And if you’re counting on that company’s business to support your own cash flow, that should be a risk you take seriously. In fact, our recent study Cost of Late Payments found that 86% of respndents believed that frequent or increasing late payments over a 12-month period have a moderate to high impact on the liklihood that a customer will go out of business or file for bankruptcy. But guess what? 61% of respondents admit they don't always analyze a potential customer's historical trade payments and late payment trends before signing a contract with them.

That's a big mistake. When you look at a company’s business credit report, it can be hugely helpful to look at their DBT, or Days Beyond Terms, over the last 12 months. This figure tells you how many days, on average, the company has been late paying their bills. Analyzing any trends or fluctuations over the last year can be eye-opening, to say the least. And if you see indicators of cash flow issues, you’ll know to take a closer look. Because while a late-payer can be annoying, you also need to consider the long-term implications, like bankrupcty risk.

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Chapter 1

DBT patterns that indicate bankruptcy risk

Looking at a customer’s DBT over a 12-month period gives you a clear picture of how stable – or unstable – their cash flow is and how likely they are to pay their invoices on time. When you’re analyzing a potential customer’s DBT, there are two main patterns you should be on the lookout for if you want to spot a company at high risk of bankruptcy.

A volatile DBT is when a company’s DBT repeatedly spikes and dips month over month. You might see a relatively low DBT followed by a very high one, or repeated rising and falling figures. Often, this is the result of many different things at once – and none of them mean great news for a business. Their revenue could be on the decline, their debt could be rising, they could be losing customers or any combination of negative financial factors.

A rising DBT is more consistent, but it still points to serious problems in a business’ financial health. In this case, you might see big leaps or gradual increases month over month – both point to a business that’s struggling under debt or with limited cash flow.

Either of these patterns in a company’s DBT can point to problems, which can then lead to an increased risk of bankruptcy. But how does that work, exactly? Let’s dig in.

Chapter 1

Frequent late payments disrupt cash flow

There’s a certain amount of wiggle room you may give customers when it comes to paying their bills. Depending on your industry, DBTs of 10, 15, or even 20 might be the norm. But when a business is significantly late in paying their bills outside of those industry standards, it can cause bottlenecks and prevent them from continuing their growth. They may be hit with more late fees, high interest charges or other penalties, which can compound to mean they’re spending even more money than they would have before. This can put a huge strain on their cash flow and put them at a higher risk of bankruptcy – which gives you even fewer opportunities for your own invoices to be paid.

For example, look at Red Lobster. In May 2024, the beloved seafood chain filed for bankruptcy, stating that they were carrying more than $1 billion in debt with less than $30 million cash on hand. Our data shows that Red Lobster had been struggling to pay their bills on time in the months leading up to their bankruptcy filing, suggesting that weak liquidity and cash flow that they revealed once they filed. In January 2024, their DBT was 31. By March, that number rose to 37. By the time Red Lobster filed for bankruptcy in May 2024, their DBT had soared to 40. Plus, 45.75% of those outstanding bills were 91+ days past due, or “significantly” late.

Chapter 1

Late payments give companies less room for negotiation

I’m sure you’ve heard the phrase “your reputation is everything” before – probably because there’s a lot of truth to it. When you have good working relationships with your suppliers, more doors open to your business. Whether it’s discounts, easier communication, priority ordering or any number of other perks, a good reputation can go a long way.

Unfortunately, the opposite is also true. If a business is consistently paying their suppliers late, those suppliers are probably less likely to bend their rules or figure out better deals or payment terms. In extreme cases, they might even refuse to work with the company going forward. And if that happens, then the business’ entire production cycle can be thrown out of whack. They’ll have to find a new supplier – now, with a bad reputation as a late payer, probably with a very high DBT – and work out all the kinks that come with that. The delays in their production schedule and difficulty finding a suitable supplier going forward can increase the company’s bankruptcy risk to a point where other businesses might think twice about working with them.

When a company is already struggling to pay its bills on time, a high-interest loan could be the final nail in the coffin. And businesses who aren’t paying their suppliers back in good time are much more likely to be hit with unfavorable borrowing terms. Nearly every business carries long-term debt, but companies with cash flow problems are especially vulnerable to things like high-interest debts, late payment fees and upfront payment requirements.

Chapter 1

Late payments interrupt the revenue cycle

You might think about a business like a machine, with many cogs working together to create one end result. But the problem with cogs is that if one of them slows down, all the others do the same. And if a business is late in paying their bills, it can have a knock-on effect on the rest of the business.

Picture this: one of your customers is struggling with their cash flow and starts to take longer to pay their bills than they did a year earlier. As a result, their suppliers start requiring more upfront payments before they’ll agree to ship their orders. Not only does that slow down your customer’s production schedule, it means that it’ll take longer for the revenue cycle to complete. They could become strapped for cash and struggle to pay you back – or even keep the lights on.

Think about Express, for example. In April 2024, the former mall staple filed for bankruptcy. When we looked at our data as bankruptcy rumors swirled, we saw a fluctuating DBT. While the company’s DBT was low (1) in March 2023, it had steadily increased to 15 by February 2024. And while DBT fluctuations don’t always mean a company is headed towards bankruptcy, they tend to be a strong indicator that something is amiss internally – usually the culmination of multiple things going wrong all together. Plus, we saw more evidence of their liquidity struggle when they took out a $65 million loan at a 15% interest rate in 2023. It all took its toll on the retailer.

Chapter 1

Late payments can have compliance implications

No business wants to pay their suppliers late, but some businesses should be even more concerned about it than others. Some industries have set laws that dictate how promptly payments need to be carried out – if a business is too late, they could face legal or compliance consequences that can have a lasting impact on their business.

Let’s say you own a construction company, for example. If your business uses subcontractors to complete projects, you may fall under prompt payment laws. That means that, if you’re late in paying your subcontractors, they’re within their rights to sue you for the payment plus interest and, potentially, further damages. From there, the regulatory bodies that govern the construction industry can fine your business. If you were already struggling with poor cash flow, these extra fines and payments would add up quickly. And if a subcontractor takes your business to court? Adding legal fees into the mix could very well be the straw that breaks your company’s back.

About the Author

Lina Chindamo, Director, Enterprise Accounts, Creditsafe

Lina Chindamo is currently Director, Enterprise Accounts at Creditsafe Canada, and a Certified Credit Professional (CCP) with over 25 years of experience in credit risk management. She has held senior leadership roles with leading companies in multiple industries in the Canadian market such as Sony Electronics, Maple Leaf Foods, and Mondelez Canada. Her experience as a credit professional along with her current role as Director, Enterprise Accounts who works closely with c-suite partners and credit teams across all industries makes her a well-rounded credit professional who is well respected in our industry.

Why Frequent Late Payments Can Be a Strong Indicator of Bankruptcy Risk

Late payments have become the norm in the business world. But what do they say about a company’s cash flow health and payment reliability?

Will your customers pay you back in good time?

Enter a company name to view a free business credit report

DBT patterns that indicate bankruptcy risk

Frequent late payments disrupt cash flow

Late payments give companies less room for negotiation

Late payments interrupt the revenue cycle

Late payments can have compliance implications

About the Author

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