Mitigating credit risk – how to know if a business is struggling


The reality of running a business is that, from time to time, a venture is not as successful as initially planned or hoped for. 

Failure is an unfortunate predicament that many businesses find themselves in and one that can trigger a domino effect of consequences for suppliers and customers alike. Business owners should familiarise themselves with the warning signs of business failure to ensure that they’re adequately prepared if a customer becomes insolvent. 

Here’s four indicators that a business customer may be in trouble:

1. Late or missed payments

Often, the most obvious sign that a business is struggling financially is that supplier bills are paid later or worse, not paid at all. Even if payments are eventually made, an ongoing trend of delayed payment is often a reliable indicator that a company is struggling. If a customer suddenly starts paying on time after a period of late or missed payments, suppliers should remain cautious. It’s not uncommon for struggling businesses to make a last-ditch effort to get their bills paid to try and save themselves from insolvency.

2. Number of credit enquiries

A business in financial trouble may look to borrow additional funds to help them stay afloat. When applying for credit, a lender will perform a credit enquiry to assess the level of risk the business poses to them. Enquiry patterns can be considered a lead indicator of risk.  If a number of credit enquiries are performed in a short period of time, the lender may see this as an indication that the business is struggling and desperate for cash.

3. Credit score changes

The calculation of a credit score considers many things, including payment defaults, changes to directorships and number of credit enquiries. Changes in company credit scores can be a powerful indicator of the financial health of a business, so it’s a great strategy to credit check a business (if you have not already done so).

4. Market trends 

Depending on the nature of a business, the market in which it operates can often be a good indicator of a business’ success in the long run. However, this can be a double-edged sword – if there are too many players in the market, it can be harder to cut through the noise. On the other hand, if the demand for a product or service is not great enough, this can make it challenging to bring in the money. 

The old adage ‘by failing to prepare, you are preparing to fail’ rings true in business, particularly due to the domino effect that can arise in situations of insolvency. However, the fallout of insolvency can be minimised with adequate preparation. Getting into the habit of regular monitoring, could help protect your business from significant loss.

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