Unless you are a business that provides consumer credit, you may not feel the need to assess your potential clients’ financial situation before you begin to work with them. Credit searching new clients is not a common practice, but there is a place for it. The result of a credit search on a potential new client could influence your decision on whether you go on to work together. We would all of course like more business, and some of us may not be able to afford to pick and choose, however, this “vetting” process can be very helpful for preventing the risk of insolvency.
One of the major reasons businesses fall prey to insolvency is due to the failure of clients to pay money owed on time, or failure to follow through on large orders. There are plenty of excuses from other businesses as to why they might not pay you, one of these being their own cash-flow problems. A credit search can show up whether or not a business you’re about to work with is likely to make payments on time based on their past history. If they have a low credit score, you may want to think about tightening up your contract or negotiating payments up front. If you are working with clients already, and have not vetted them first, there are some signs you can be aware of that might mean you need to renegotiate.
How to spot the signs of client insolvency
Lengthening payment periods
If your client is requesting longer and longer periods of time to pay back any invoices owed, this could indicate trouble with cash-flow. Try to open up communication with your client through your credit control team, and find out what the reasons are for late payments. It may simply be a “rough patch” but try to find out enough information so that you can feel confident your client’s rough patch doesn’t turn into your own.
Has your client entered a late filing period with Companies House?
Companies will often enter late account filing because they are struggling with their finances and may not want to openly admit it. Once accounts are filed, the records are open to anyone to view and as such any creditors will be able to see the performance of the company and may withdraw credit to poor-performers… and this would have a significant outcome on your client’s cash-flow.
Is there a sudden change within your client’s business?
If your client is having frequent periods of change in management, staff redundancies, reduction in suppliers and more, this can be an indication that the company is struggling and may have difficulty meeting its financial demands. Try to maintain a good level of communication with your client to learn more about why changes are happening in their business, so that you can predict whether these changes will affect when and how you are paid. This is relevant not just to clients that are downsizing, but also as companies grow as the introduction of new accountancy procedures could leave you waiting longer or having to carry out more admin in order to receive payments that once came to you with ease.
Have your client’s buying habits changed to smaller and more frequent orders?
If your client has started to change their buying habits from placing large orders to smaller and more frequent orders, this can be indicative of them buying as and when cash is available which could show a problem in cash-flow within their business. If a client changes their order pattern it’s always worth a phone call to find out why. They may have found a competing supplier that they’re trialling, so getting to the bottom of this issue is best tackled sooner rather than later.
It is always recommended to ensure that you have a mixture of different clients and workloads to ensure that you aren’t greatly impacted by the inability for a single client to pay any money owed, it is also advisable to always ensure you have between 6 and 12 months of liquidity in case of any cash-flow emergencies, ensuring your business can continue effectively and not run the risk of folding due to unpaid invoices.
How can I minimise the possibility of running into client insolvency issues?
Monitor your client’s financial performance regularly
Check Companies House for the latest accounts to see if your client is performing financially well as this will indicate year-on-year whether your client is growing or declining and will show where money has been allocated if any for dividends.
Use credit referencing agencies or online credit search systems
Continually visiting and checking your client’s credit rating will be a good identifier for payment problems as any drops could be due to any County Court Judgements (CCJ’s) that may be accruing.
Build a relationship with your client
Getting a client to tell you upfront about any payment issues will always be easier to manage versus taking enforcement action, speaking to your client and asking about business performance will give you a better chance to prevent any payment issues sooner rather than later. Use your CRM system to record times and details of conversations with your clients, so that you can see where patterns are emerging.
Get familiar with your client’s account department
If a business is having cash-flow problems, they may be withholding payments until they are chased, so making sure you’re in regular communication with the accounts department requesting payment could be the answer to getting your money quickly.
Don’t jump straight into legal action
If you are having problems with a client, it is worth considering mediation before enforcement due to the increased costs associated with taking legal action, also the time required to go to court will take you away from other profitable work that your time would be better focusing on.
If you’re going through business insolvency or worried about a client’s insolvency and its impact on your business, give us a call today to see how we can help you plan for and minimise risk. We can be contacted on 01323 446644 or by email email@example.com