Real life story: Customer insolvency led to my company failing
Learn from the experiences of a business owner who was forced to cease trading after multiple customers went bust.
Many businesses have emerged from the pandemic to find trading conditions have dramatically changed. It may be that the customer base they had pre-pandemic has diminished, or the financial health of their existing customers isn’t as robust as it was previously.
The importance of protecting your business when supply chains are weakened and customers are potentially less financially stable cannot be overestimated. However, managing risk whilst growing a successful business is a tough balance to strike.
Alan Baird is the co-founder of the Hilton-Baird Group of companies and has over 20 years’ experience in risk management. Yet his career in risk began in an unusual way, in that it began after his business was forced to cease trading after multiple customers went bust.
Here, we speak to Alan about his experiences, drawing upon the lessons learnt and exploring ways to protect businesses from a similar fate.
Q: Could you set the scene a little with regards to the business you were running please?
A: Myself and another Director owned and managed the business which traded in the acoustic and thermal insulation sector. We employed around 80 staff and bought insulation products from large suppliers before selling them on to lagging companies who completed fit outs for a variety of contractors.
During the late 1980’s we had witnessed a period of high economic growth and rising inflation which was followed by the recession in the early 1990’s, primarily caused by high interest rates, falling house prices and an overvalued exchange rate. This was putting additional stress on businesses who were beginning to feel cash pressure.
Q: Which factors would you say were pertinent in the demise of your business?
A: The primary reason was the very quick succession of losses we suffered as a number of our customers went into administration in rapid succession. The companies we supplied were small subcontractors predominantly and they were being squeezed by their contractors, who were also feeling the pinch. Pushing the pain down the supply chain was a lot more prevalent than it is today.
We had grown quickly and, in hindsight, it’s fair to say that we focussed on increasing turnover and hadn’t adequately evaluated the creditworthiness of our customers or the potential risk of customer failure. The recession and increased pressure from contractors on our customer base meant that, whilst we had managed without any significant losses in the past, this wasn’t going to be sustainable.
With no way out, many of our customers entered into pre-pack administrations overnight. I remember the evening well. I had phone call after phone call and knew that this would be a fatal blow for our business. Many of these customers started trading again but under newcos, meaning we were unable to recoup our losses.
Q: What advice would you give businesses trading in the uncertain times we are currently facing?
A: It’s been a really hard time for many businesses but government support has enabled many to keep trading. Now that most of these initiatives have come to an end, a rise in insolvencies is predicted. This will lead to an inevitable weaking of supply chains and trading conditions will be extremely tough for some time to come.
With regards to advice, I think the most important factor will be knowing your customers and ensuring you are adequately protected. Businesses should have thorough processes in place to credit check new customers, sign them up to credit terms and have an effective order to cash process in place to ensure they are paid to terms.
Keeping in regular contact with customers is key as the economy and many businesses remain volatile. Monitoring customers regularly to assess if their financial standing has changed at all is really important, as is looking out for any signs, no matter how small, that something may not be right.
Additionally, credit protection can provide peace of mind that if your customer defaults, your business won’t be out of pocket.
Credit insurance can be provided as a standalone facility, or you could look at debtor protection incorporated into an invoice finance facility – non-recourse invoice finance. The added benefit of utilising an invoice finance facility is that you can access cash within 24 hours of the customer invoice being issued to help with cash flow management.
Q: Thanks for sharing your experiences. How did your journey progress following the business failure?
A: It was a catalyst to me changing career and I went to work for an invoice financier which I found fascinating, as I gained a real insight into managing sales ledger risk and the importance of knowing your customer base inside out. This experience led me to co-founding the Hilton-Baird Group with my son, Alex, in 1997 to help businesses with their cash flow needs, primarily sourcing invoice finance solutions.
See how we helped this recruitment business secure a new credit insurance provider after the business was left vulnerable in the height of a recession.
If you would like to know more about how to protect your business with credit insurance click here or contact us on 0800 9774833 to discuss your options.