Companies must be prepared for customer and supplier insolvency

04 July 2018

With industry data showing a significant increase in corporate insolvencies in the UK, companies cannot afford to be complacent about the prospects of a major customer or supplier going under.

With industry data showing a significant increase in corporate insolvencies in the UK, companies cannot afford to be complacent about the prospects of a major customer or supplier going under.

The latest figures from the Insolvency Service indicate that corporate insolvencies in England and Wales rose 13 per cent in the first quarter of this year compared with the final three months of 2017.

The results from Scotland were even more alarming, with Accountant in Bankruptcy reporting that the number of corporate insolvencies was up 28 per cent over the previous quarter and two-thirds higher than for the same period last year.

Managing counterparty risk should therefore be a top priority for all businesses. Contingency planning is vital.

Research conducted by R3 – the association of business recovery professionals – found that around one in five corporate insolvencies are fully or partially as a result of another company becoming insolvent.

Companies that depend on a single supplier or customer for a large proportion of their business are often urged to be vigilant for signs that a key business partner may be experiencing difficulties.

However, Phillip Sykes, Partner and Head of the London Restructuring Practice at audit, tax and consulting firm RSM, says this has become harder to do:

“The increase in the number of companies not requiring audits has made it more challenging to assess the financial stability of counterparties.”

He adds: “In this case, the most you will get from Companies House is a balance sheet. There are a number of organisations that offer credit tracking services, which monitor publicly available information, but, to some extent, once information is in the public domain it is too late to act on it.”

Monitoring risk

Perhaps surprisingly, Sykes suggests monitoring social media for stories about key business partners.

Less surprisingly, he advocates maintaining a risk register of customer and supplier relationships.

Trade credit insurance providers will help the business provide credit scores for customers through monitoring their financial health as well as boosting relationships with other key stakeholders – such as bank and lenders – who understand that the company is managing its risk, explains Paul Barber, Chair of the North West committee of R3 and a Partner at Begbies Traynor Manchester.

“However, companies should be careful about inadvertently breaching the terms of their cover,” Barber says.

“A long-standing counterparty may ask for a favour of some kind, which could lead to cover being withdrawn if they then encounter difficulties.”

There will be extra considerations when dealing with international counterparties; for example, there may be restrictions where insurers will not provide cover for overseas transactions, or costs may increase significantly.

“When trying to assess what cover is needed for a company, the directors should take care to be vigilant, weigh up risk and reward, and take advice from a reputable source,” adds Barber.

Sykes observes that credit insurers have become incredibly important in terms of restructurings.

“One of the factors that precipitated the collapse of Comet, for example, was the withdrawal of credit insurance to its suppliers,” he says.

“If you are heavily exposed to a company that starts getting into difficulty and the credit insurers start to reduce the amount of cover they are willing to provide, it is an early warning of potential problems.”

Companies have to be proactive to limit the potential for significant losses from customer insolvency, adds Sykes.

“Credit management is the most important element of protecting a business against losses, ensuring that you are being paid according to credit terms,” he concludes.

“In most cases, the creditor that shouts first and shouts loudest is the one that gets paid.”

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For more information please contact Stuart Winter, CEO of UK retail on +44 (0)115 935 5351 or email stuart_winter@jltgroup.com

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