What to do about Customer Insolvency?

The risk of major customer insolvency is a universal issue that affects businesses of every size, operating in every sector. If your business generates a large percentage of its income from a single customer, then you’re no doubt aware of the risks. The customer could switch to a competitor, or worse still, it could enter insolvency without paying your company for its products or services.

Even in a thriving economy, the risk of a customer becoming insolvent is ever-present. If you regularly sell to your customers on credit, there is a chance you will either be paid late, or in the worst-case scenario, not at all. For many company owners, this can be one of the most challenging aspects of running a business.

Are you Worried about a Customer’s Financial Stability?

It’s perfectly natural to be worried about the financial stability of your customers. After all, losing such a large source of income could be the trigger for your own cash-flow problems.

In the majority of cases, there are ways to detect if a customer is struggling. If a long-term customer changes its payment behaviour or needs frequent reminders before making payments, this could be a sign of trouble.

Of course, credit-checking prospective customers before you agree to do business with them should already be part of your business. You should also keep a lookout for industry news and articles about their success, failures and other events linked to their financial health.

Unfortunately, none of these methods are guaranteed to be completely effective, but they can help you lower the risks.

Below we’ll cover the major warning signs your customer could be insolvent.

A Customer has Missed a Payment

Plenty of customers miss payments simply because of a mistake in their accounting systems, so this should not necessarily start the alarm bells ringing. However, this is still something you need to rectify quickly. 51 percent of small businesses cite cash flow, working capital and late payments as their main business concern; while 15 percent say late payments threaten their ability to trade.

If a customer fails to pay on time, a quick reminder will usually be enough to prompt the payment. Thanks to the Late Payment of Commercial Debts Act 1998, you can also charge interest on late payments, which acts as an incentive to pay on time.

If the payment is still not forthcoming, there are a number of options available to you. Issuing a statutory demand shows you are serious about the debt. This gives the customer 21 days to pay or face legal action. If 21 days pass without the payment being made, you may then be able to issue a winding-up petition – a serious step that could result in the compulsory liquidation of the company.

What if the Customer is Insolvent?

If the customer is insolvent, it genuinely won’t be able to pay the money it owes. Insolvent companies must not show preference to particular creditors and instead should wait for the insolvency practitioners to resolve the business’s debts.

If the company is insolvent, it’s important you make the insolvency practitioners aware that you are a creditor. The customer may propose a company voluntary arrangement (CVA), in which case you’ll be contacted to agree on the arrangement. If the CVA is agreed, you’ll receive a percentage of the money you’re owed, usually over a period of five years.

If the company is liquidated, as an unsecured creditor you’ll have to wait your turn to receive the money you’re owed. Realistically, by this stage, there’s likely to be very little or nothing left at all.

Don’t let Insolvent Customers Damage your Business

Losing a customer, and even the money it owes your business, is, in many cases, an unavoidable part of doing business. However, what you can do is ensure that the damage this causes is not enough to make your business insolvent.

By taking steps to protect yourself from financially unstable customers, paying for credit insurance to reduce your losses, and diversifying your customer portfolio, you can reduce the impact of insolvent customers.

Are you Experiencing Cash-flow Problems Thanks to Insolvent Customers?

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