How to tell if a customer is in financial trouble


New research suggests a wave of business insolvencies will hit the UK in the next year.

According to Euler Hermes, 37,000 businesses are expected to fail before 2023, with 17,100 expected to fold in 2021 and 20,540 in 2022.

A separate report published by the Bank of England found that 33% of SMEs hold debt levels of more than 10 times their cash balances, compared to 14% before the pandemic. The percentage of those with high debt relative to both cash balances and monthly inflows trebled to 10% from 3% over the same period.

With this in mind, we look at why so many businesses are in financial trouble and how you can spot which companies are struggling. Plus, we offer ways you can protect your business from the heightened credit risk.

Why are so many businesses in financial trouble?

During the pandemic, many businesses were only able to survive thanks to the range of emergency measures put in place by the Government.

Now that support is being withdrawn and the various schemes are ending, many fragile companies are at a high risk of default.

While the Bounce Back Loan Scheme (BBLS) and Coronavirus Business Interruption Loan Scheme (CBILS) provided a lifeline for many businesses – it is estimated that 18,900 companies were spared insolvency as a result – many are now having to make repayments before they are financially ready or able to do so.

As well as this, through the furlough scheme, the government was paying towards the wages of people who couldn’t work, or whose employers could no longer afford to pay them.

Nearly one million workers were expected to still be on the scheme at the end of September when it ended.

Until recently, companies in financial distress because of the pandemic had been protected from creditor action. But this scheme is now being phased out and, with the failure of one business threatening a knock-on effect throughout supply chains, even companies who have successfully weathered the storm could find themselves in financial difficulty through no fault of their own.

This is why it’s more important than ever to know who you’re doing business with to manage your credit risk.

Read the growing value of credit insurance as we enter 2022 blog


7 signs a company is in financial trouble

1. Reluctance to provide key information

Any sort of reluctance to provide key business information could be an indication that something isn’t right.

So at the very outset of your relationship with a customer, send an account opening form to obtain key details.

This should include their full trading name, legal status, registration number, address and the key contact details of the management and contacts responsible for accounts payable.

It’s prudent to verify this information regularly to ensure it remains valid.

If you are suspicious for any reason, you might want to request full or partial payment upfront to limit the risks to your cash flow.

2. Strange client behaviour

Whilst account opening forms lay the foundations for getting to know your customers, your relationship with them can also provide indicators as to their financial health.

Creating a rapport with your customers is a great way to learn their normal behaviours so you can spot any sudden changes which could be a sign of trouble.

Whether it’s a change in their telephone manner or the tone of their emails, any sudden changes should spark alarm bells.

For repeat customers, look out for any changes to their typical buying and payment patterns. If they stop placing orders or their pattern drastically changes, or, say, they start paying a few days later than normal, these could be signs that they’re struggling.

Likewise, clients who are disorganised, indecisive, extremely over-critical or hesitant, especially if it’s out of character, could be a sign of trouble and, at the very least, you should proceed with caution.



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3. Missed or late payment

If a customer suddenly starts stalling payment or paying your invoices late, in part or not at all, this can be a strong signal that they could be experiencing financial difficulty.

Contact customers quickly if an invoice becomes overdue and make sure you routinely credit check all customers – existing and new.

This will reveal their current financial health and if they have a bad credit rating or any CCJs filed against them.

You could also look at their filed accounts, which will help you understand their financial health. Late filings in particular could be a sign of trouble.

As well as this, there are various places online where you can find evidence of poor payment. For example, the payment reporting regulations require all large businesses to report on their payment practices whilst the Prompt Payment Code shows those who have committed to paying promptly and signatories who have not adhered to the code.

Accessing this information could reveal if they have a history of missing payment deadlines.

If any of these sources reveal that your customer is a risk you should consider taking full or partial payment upfront.

4. Staff turnover

If a company has a high staff turnover, this could be a cause for concern.

That’s because, when a company is struggling, many employees will seek other employment, perhaps to escape an unpleasant working environment or to find better job security.

Another key indicator of financial trouble is when a number of top-level executives resign over a relatively short period of time.

If an employee leaves suddenly, don’t be afraid to ask questions to help you better understand the situation.

It’s also vital that you keep up-to-date contacts at the company so that you always know the most relevant person to contact for payment.

Without the right information you are likely to experience delays in payment.

5. Lack of communication

If a customer is suddenly harder to contact they could be avoiding you or unable to pay.

Perhaps your calls are going unanswered or you’ve left multiple messages without a reply, or letters haven’t been signed for or have been returned.

The moment that you realise your customer is becoming harder to reach you should investigate to protect your business.

If the customer disappears altogether, debtor tracing services exist which could help you locate even the most evasive customers.

6. Sudden changes to the business

Another sign that your customer might be in financial difficulty is sudden changes to the business.

As well as any changes in buying and payment patterns, sudden stock or asset sales, reduced service levels or even rapid growth could be a red flag.

Remember to keep a watchful eye on industry news too. This could highlight any challenges throughout the industry that could impact your client and their ability to pay you.

7. Gut feeling!

There’s a reason many people trust their gut – it’s usually right!

If you have a gut feeling that a customer is in financial difficulty, it’s worth exploring further. Learn to trust your instincts and, at the very least, treat these customers with caution.



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How can you protect your business?

It’s important not to wait until you suspect a customer is in financial difficulty to take measures to protect your cash flow, as by then it may be too late.

Instead, ask new customers to complete account opening forms and ensure you’re routinely credit checking new and existing customers.

The more you know about your customers, the easier it is to spot when they might be in financial difficulty.

Learn more about how to assess and manage your credit risk here.

Credit insurance can also be a useful tool to protect businesses against the risks of bad debt by safeguarding your cash flow against debtor insolvency or protracted default.

Whilst facilities can be provided by credit insurance companies as a standalone product, bad debt protection can also be incorporated into an invoice finance facility, which will additionally advance up to 90% of an invoice’s value within 24 hours of its issue to help you keep cash flowing whilst trading on credit terms.

As a specialist commercial finance broker, we can introduce the most suitable credit insurance solution for your business’s requirements. Contact us on 0800 9774833 or request a call back to discuss your options.

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