If you believe that a supplier is insolvent, there are warning signs that may help you distinguish whether it should be a cause for concern to you. The level of risk that this poses to your business will be determined by whether they hold a core position in your supply chain and if they owe money to your business.
A business is deemed insolvent when it no longer has the cash to settle payments and keep the business ticking or its assets exceed its liabilities. If the supplier can’t meet your invoices as and when they fall due, it must consider ceasing to trade immediately to protect the financial position of its creditors, including you if you are owed monies.
What are the warning signs that a business is insolvent?
Trading with a business that may be insolvent or in serious financial difficulty increases the bad debt risk posed to your business. Bad debts are overdue payments to you that are unlikely to be paid and therefore likely to be written off.
Here are some warning signs to spot whether a company is likely to be having financial difficulties:
- Poor cashflow – If the supplier is struggling to purchase new stock and replenish existing stock, this may be a sign that they’re experiencing a cashflow shortfall. Poor cashflow can disrupt everyday company operations as if there’s no cash to fuel the business, the company may likely become insolvent without a cash injection.
- Lack of commitment - If the supplier is unable to commit to lead times as there are stock shortages as a result of cashflow problems, the business may be experiencing problems. A warning sign of this may be poor communication.
- Staff shakeup – If there’s a movement of staff with management and other key staff resigning, this may indicate deep rooted problems that could disrupt the future profitability of the business.
- Red flag – Credit risk systems, such as Red Flag Alert, send alerts when the health rating of key suppliers deteriorates. Keep a tab on your suppliers to check if they’re on track to becoming insolvent, or already insolvent.
- Companies House/The Gazette – If a business is subject to creditor action, such as company liquidation via a winding up petition, or enters an insolvency procedure, this will be recorded on Companies House or The Gazette.
If the business is in company liquidation and the supplier owes money to you, you’ll want to submit your claim to the insolvency practitioner or official receiver. If you suspect that they’re insolvent, you may wish to petition to wind up the company as a last resort after attempting debt recovery through payment reminders, applying interest, and sending a final demand letter.
What is a winding up petition?
A winding up petition is a petition to the courts to wind up a company that is insolvent. If they’re unable to meet their liabilities, the company director must stop trading to not incur any further debts to creditors and risk personal liability.
If a winding up petition is successful, the business will be forced to close and removed from the Companies House register. The company can contest the winding up petition if they enter a formal insolvency procedure or disagree with the debt in question.
A County Court Judgment is often a precursor to a winding up petition which is a county court order that requires you to make payment within 30 days. If you fail to make the payment or enter a payment plan, the debt will be enforced.
Mitigating the risk of insolvency
As the cost of living crisis continues and businesses are yet to fully recover from Covid-19 disruption, more businesses are experiencing cash flow problems and credit pressure. Company directors must act early if they wish to preserve business value, profitability and reduce the risk of becoming insolvent.
