No one sets out to work with suppliers or customers that will one day become insolvent. If you have done the right amount of due diligence at the start of the relationship, you will hopefully not encounter such a problem, but no amount of due diligence can be bullet proof. Over time, a client’s financial situation may change, which could have a significant impact on your business. You could be left with a bad debt that you have to absorb.

It’s not uncommon for companies that experience this type of loss to be facing insolvency themselves within the next 12 months.

So, how do you spot a client in financial difficulty? In this blog, we take a look at the common signs of an insolvent company.

Definition of an insolvent company

An insolvent company can be defined as a company:

• That can no longer pay their bills when they fall due – the “cash flow” test.
• Whose total current liabilities outweigh the value of its assets – the “balance sheet” test.

Insolvency can be measured using the two tests: the cash flow insolvency test and the balance sheet test. Both tests can help to spot early warning signs of insolvency.

You won’t necessarily have insight into the financial details of the companies you work with but there are some signs you can look out for.

Common signs of an insolvent company

Struggling to meet financial obligations.

Companies that are extending deadlines to meet their financial obligations are probably experiencing a cashflow issue. It could be a short-term blip, but left to fester, the problems could reach the point where they can’t be resolved.

Fixed and Floating charges

The registration of additional fixed and floating charges may indicate further borrowing when a company is under financial strain. .

Facing legal action

Creditors taking legal action to recover the money they are owed is a significant red flag to be wary of. This could be in the form of a statutory demand, CCJ or winding up petition. It indicates the company may be in serious financial difficulty, most likely insolvent.

Experienced unsecured losses

If your client has themselves been an unsecured creditor in an insolvency procedure, they will be hit financially. They could recover some of the money they are owed but the majority will most likely have to be absorbed as bad debt. Depending on their financial stability, this could have a devasting impact.

Other indicators of a company struggling financially

There are other indicators to be wary of:

• If a company changes their accounting period – they may be trying to mask the financial problems
• If a company operates on tight margins – small changes in market conditions or even interest rates could have a huge knock on its financial stability
• If a company has little cash reserves – they have limited ability to ride out any small cashflow issues, and could be operating on the edge of insolvency

Seeking advice before problems escalate

If you recognise any of the warning signs in your company, you should speak with our team today. Addressing financial instability as soon as possible gives the company its greatest chance of recovery and survival. It also improves the chances of surviving the impact of an insolvent client or supplier.

Call our expert team on 0808 196 8676.