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How to spot if clients are at risk of insolvency

Any business can become insolvent any time in its life, but if one of your clients is one of those unfortunate enough to have more outgoing debt than incoming funds, it can be a worrying time, especially if they owe you money. But how are you supposed to know if a business that you deal with on a day-to-day basis is running into financial difficulty or is at risk of insolvency?

Warning signs of client insolvency

Companies and businesses rarely become insolvent overnight, and usually, experience periods of financial difficulty beforehand. While companies and individuals enduring an insolvent period are unlikely to spread news of their financial troubles, these periods of turbulence are often accompanied by several warning signs.

Late or missed payments

If the client has missed or delayed a payment, it could be a warning sign that cash flow is tight. A restricted cash flow may be a temporary issue due to business investment or expansion, or it may have long-lasting ramifications. Sometimes, a client might know they won’t be able to pay a particular invoice and notify you in advance which, while helpful and thoughtful, doesn’t make the issue go away.

Late filing of accounts

While a company not filing their accounts on time may not directly affect you, it could lead to trouble further down the line. You can check with Companies House if you suspect a client has filed its annual accounts late. Checks are free, and it will allow you to spot other anomalies such as changes to directors.

Sudden changes in business structure

Staff and process changes are a fact of running a business, often to fix something that didn’t work as well as it could do. Just because someone has left, or a new procedure is introduced, doesn’t mean the company is in financial trouble. However, if processes are regularly swapped out without notice, managers suddenly change along with their approach, along with rounds of redundancies and cutbacks, it could be a sign that heavy restructuring is underway, which may be the result of financial difficulties.

Less frequent, or smaller orders

Some clients will request your services infrequently, while others will be your ‘bread and butter’. While clients who only provide occasional work are unlikely to affect your incomings too much, unless the work was substantial, if a client who usually provides you with a lot of work suddenly stops sending it, or they send you less work than normal, it could be a sign that they’re experiencing financial trouble.

They’ve been issued a CCJ or legal action

If your client has been issued with a court order or County Court Judgement (CCJ), it’s a fairly apparent sign that their finances are unhealthy.

While a client is unlikely to admit they’re battling court action like this, you can check the ‘Register of Judgments, Orders and Fines’, or ‘CCJ Register’; a public register that lists court orders and financial penalties filed against a company or individual.

 

risk of insolvency

What can you do if a client is insolvent?

So, if you’ve noticed some of these warning signs, your client could be insolvent, or at risk of insolvency. If this happens, your main concern should be to protect your own business from the potential fall-out. If the client owes you money, you should act immediately to claim what you owe.

Perform a credit check

Although it may seem a bit late in the day, a good practice to minimise the risk of debt for your company is to undertake credit checks on those who pay you for your goods or services. Ideally, these credit checks should be undertaken before allowing credit, as they may show clear evidence of a business which does not honour its credit arrangements.

It’s good practice to run credit checks periodically for ongoing customers. Doing so becomes more important if you spot warning signs that your client is suffering cash flow problems.

If a credit check reveals poor practice or cash flow issues, you could speak to the client to arrange a credit limit or a credit arrangement to ensure you’re not out of pocket should the worst happen.

Start work to collect your monies

If your client owes you money and they haven’t paid, you should begin the process of reclaiming it. Although it may make things awkward and spoil a relationship with a client, you must prioritise your own business in these cases. You could apply for a CCJ or statutory demand.

If a company owes you more than £750, and it hasn’t been paid for more than 21 days, you can apply for a winding-up petition, which will freeze the company’s bank accounts and effectively force them into compulsory liquidation.

If an individual owes you more than £5,000, you can petition to make them bankrupt.

If your client becomes insolvent, it becomes more difficult to recover what you’re owed as the client is obviously in financial trouble. The client should contact a licensed insolvency practitioner (IP) if they’re insolvent. The IP will work with the company to work out its options and aim to pay back a portion of the debt to the client’s creditors. This could be through a Company Voluntary Arrangement (CVA), an administration, or liquidation.

In summary

Financial trouble rarely happens overnight or without prior warnings. If you start noticing a client or customer has started missing payments, or their accounts haven’t been filed on time, their cash flow could be in poor health, they could be at risk of insolvency. They may reduce their orders from you, or they could be challenging court orders or CCJs. Watch out for abrupt changes in staff or management, and cutbacks to their resources. While one of these on their own isn’t necessarily a sign of financial trouble, more than one simultaneously could be a sign they’re insolvent, and you should think about taking necessary action to recover any money they owe you.

How we can help

We work to help businesses in all kinds of financial difficulty, advise on how to handle situations which may place your business at risk of insolvency, and we can also advise you how to deal with an insolvent client. In all instances, it is best to seek professional advice as soon as you are alerted to a problem. All our advice is free and impartial, with no obligation.

Authored by Lisa Hogg

Lisa Hogg

Director & Licensed Insolvency Practitioner

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