Here’s 5 Ways You Can Spot a Sinking Ship

Whether it’s in investing, a partnership, a sponsor, or simply a paying client, a sinking ship can cause a deep wound in the business. Here Rachel Mainwaring, Operations Director at Creditsafe talks Finance Monthly through the steps in identifying a failing house. One of the fears for any business is that it won’t get paid […]

Whether it’s in investing, a partnership, a sponsor, or simply a paying client, a sinking ship can cause a deep wound in the business. Here Rachel Mainwaring, Operations Director at Creditsafe talks Finance Monthly through the steps in identifying a failing house.

One of the fears for any business is that it won’t get paid for the work or services it has supplied because their client is in financial difficulty. This fear became more prominent last year when, for the first time in three years, there was an increase in businesses closing their doors through insolvency (up 24% on 2015).

Given the uncertainty within the UK economy after the Brexit vote, an increase in failures was not entirely surprising. But knowing who will be affected is a trickier call. When a company gets into trouble, it can often take the businesses it deals with by surprise. Unfortunately, a sinking business is not always as obvious as the Titanic going down with the band playing.

With 2017 set to be just as unpredictable as 2016, it’s essential that companies are attuned early to the signs of possible distress. Obviously a negative balance sheet and falling profit can indicate that a company might be failing – but results statements in Annual Reports or company filings can be issued many months after year-end and long after problems have begun to take hold.

There are other, less obvious signs that business leaders should be looking out for when doing their due diligence on the companies they are in business with, as well as those they may be about to start working with.

These signs can usually be found in a company credit report, which is why they really are worth investing in obtaining. Things to look out for include:

Changes in directors. It’s natural for directors to change occasionally within a business, but if it becomes a trend, or if a director isn’t replaced within a few months, it could be a sign of deeper issues within the company.

Directors with previous failed ventures. You can check individual directors’ histories – and if they have a record of previous failures, that could be a warning sign. Our data found that if a director has been involved in a company that has failed in the last three years, they are nine times more likely to fail again compared to a director who has never been involved with a business collapse.

Adverse payment information. According to trade body R3, at least one fifth of UK corporate insolvencies in 2016 were caused by late payment or the insolvency of another company. If there is an increase in the number of days a client is taking to pay their bills, that could indicate cash flow difficulties. Check whether their average Days Beyond Terms (DBT) has increased or whether they have any CCJs against them.

Spike in views of a company’s credit report. It’s natural that if other businesses are worried a company is getting into financial difficulties, they will check their credit status and report. So look to see whether there has been a rise in the number of views. It could be due to other issues, but nevertheless it can be a useful indicator.

Links with businesses with low credit scores. Many companies are owned by or have links with other businesses. Their financial position can have a knock-on effect on each other. So another thing to look at in a credit report is the information on linked companies and other businesses in the Group structure. Look at their credit scores and histories – it could be very worth doing.

It’s important to study a credit report carefully and not merely look at the topline statistics. It’s also important to do some of your own research. What’s been written about an organisation in the press, for example? Do you have contacts at other businesses who may have worked with them?

What’s more, it’s important to keep monitoring on an on-going basis: if they seem fine in January, that doesn’t necessarily mean they will be, come July.

It’s also possible to sign up for risk tracker alerts that automate your monitoring process and notify you when there has been a change to a company’s credit report – from a director leaving to the company receiving negative publicity in the press.

Keeping abreast of your clients’ credit status is not difficult to do. The small effort involved could pay for itself many times over if it prevents your business incurring a bad or irrecoverable debt.

1 Comment
  1. Pauline says

    Interesting article –

    Charles I wonder if I could add a few points more from the entrepreneurial spirit point of view .. I think if business people thought this way, there would be no business.

    You cannot be successful without failing – to measure an individual or organisation by their past failures without delving into facts robs the financiers of great opportunities.

    For example … I have an associate who has quite a few black marks against their name – residue of a failed partnership – valued around $50,000, not much in the order of things … delving further you find that same individual is owed approximately $2 Million from the extortion of a previous Director who took off with about $35 Million of trading … the exiting director who controlled the cash, accused my associate of extorting $400,000 over a 13 year period.

    Another associate helped to spear head a $10 Billion Philanthropic Farming Project, set about floating company but then researched one of the “Financiers” who turned out to have been jailed 3 times for fraud … has recently been jailed yet again because ACCC did not do their duty of care to ensure bad financiers stay unregistered. One of his favorite tricks was to create fictitious accounts and use a Credit Collector to seek payment.

    Another thing financiers could consider is the longevity of an organisation – there are Directors and Company Owners who close down and open up again under a new name every three years – they dump their creditors and move on with a clean slate. I know of one organisation in Adelaide, purporting to be a world leader in their game, that is up to the 8th new name.

    Longer term organisations that prefer to carry their debts are aware of their black marks and have a better chance of clearing them.

    Crippling these individuals through a black credit rating only lowers the chance that the Finance companies will ever be repaid.

    Such a lot of trickery and extortion in business now.

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