Spotting the signs of a client in distress

office desk with peopleKeith Tully details the key indicators for a creditor to look out for.

As a creditor, it’s not always easy to know when a client’s company is failing. Though you will have limited access to information, there are usually signs that can provide vital clues about a company’s financial health.

These act as an early warning of potential trouble and can help to protect your own interests as much as possible.

Here are a few of the indicators that your client may be in financial distress:

Poor communication

Your customer no longer returns your calls, emails go unanswered, and even though you have enjoyed an open and amicable business relationship in the past, communication has become poor. If you can’t speak to someone in authority about an unpaid bill, it is a strong indication that something is wrong – or at least, an indication that you should maybe start invoicing on pro-forma terms in the future.

Slow or erratic payments

The company may have requested more time to pay, or tried to renegotiate terms of payment. These are both signs of a business in distress and may be a precursor to insolvency, or the starting point of a slow decline.

Invoice disputes

Initiating unjustified invoice disputes allows your client a little breathing space to pay their bills. It is possible they could be using this tactic with all their creditors, and you may hear on the grapevine that all is not well.

They are using a factoring company

Invoice factoring provides a quick injection of working capital, and can be a good option for businesses struggling to maintain cash flow. The factoring company takes over the credit control function, and collects debts more efficiently. If your client is factoring in-house rather than using a third party, however, it will be more difficult to tell, as very little will change from an accounts perspective.

Loss of reputation

Have you noticed a general loss of reputation or a decline in the public perception of your client’s company? This situation often precedes insolvency as the business struggles to retain its footing or market share. Maybe they've taken a bit of a hammering online, such as on social media channels.

Have they rebranded?

If so, take note of whether a new or complementary product/service has been introduced. They may have simply repackaged the same business in an attempt to increase sales, but with no obvious new stream of income.

Senior staff resignations and low staff morale

The resignation of one or more senior members of staff is a worrying sign, and added to a general decline in staff morale, gives a clear warning that all is not well. When you speak to finance staff, they may inadvertently indicate that something is wrong.

Other suppliers are refusing to trade/issuing formal demands for payment

If other suppliers have put a stop on your client’s account, or issued a formal demand for unpaid bills, the company could be close to insolvency. A creditor owed more than £750 can petition for the company’s winding-up through the courts.  

Valuable information is also available from the register at Companies House. You can find out if a director has resigned, track the company’s progress, and obtain statutory accounts and annual reports.

About the author

Keith Tully specialises in advising company directors who are facing financial distress. He offers this support though Real Business Rescue. Keith joined business rescue specialist Begbies Traynor as a partner in 2013 after the acquisition of his own business recovery firm. You can follow Keith on Twitter @RealBizRescue.