Limiting Insolvency Risk

Not every business survives. But it is important that you manage your exposure to the risk from other businesses becoming insolvent in order for you to continue to thrive. It’s all about being alert for the signs and maintaining rules routines in your business to ensure that you are actively managing the risks.

Here’s a rundown of things to keep on top of, which we call the ‘Five Cs’

Control credit

Make sure you have a clear credit control system which details how you will deal with overdue invoices. Not only does it ensure that you get paid as quickly as you can but it will flag problem customers. Remember, credit limits are yours to give and not customers to expect ,so don’t extend them without very good reason. Keep a constant eye on your aged debtors report. Payments that gradually slow, requests to extend credit terms, changes in the people you deal with, erratic ordering patterns, a contact who becomes unusually hard to reach – any of these individually might mean little. Don’t be afraid to act before a problem arises.

Clear Contracts

Have clear Terms of Trade in place which govern your relationship with your customers. They will be worth their weight in gold if things go wrong. For example, a properly drafted retention of title clause in your Terms and Conditions means your goods remain your legal property until they’re paid for. If a customer becomes insolvent before paying, you may be able to recover the goods directly, ahead of the insolvency process, provided they remain identifiable and haven’t been incorporated into something else.

Credit checking

Buying a report from a leading credit referencing agency may mean a little outlay before you start trading with a business, but it is a good investment. Forewarned is forearmed. Better to have your eyes fully open than to walk into a problem.

Credit insurance

Credit insurance protects against bad debts. Premiums are typically a percentage of insured turnover, and cover can apply to domestic debts, export debts, or both. For businesses with significant exposure to a small number of large customers, it can be the difference between a painful but manageable loss and a business catastrophe. In addition to helping you reduce the risks of non-payment, the credit insurer will undertake some of the credit checking process.

Cash flow resilience

Businesses that manage their cash flow actively, collecting promptly, using invoice finance to maintain liquidity, keeping working capital healthy, are better placed to absorb a customer insolvency without it cascading into their own financial difficulty. The headroom that good cash flow management creates isn’t just about funding growth. It’s also about having the resilience to handle the unexpected.