Thanks to a massive injection of state-funded liquidity into global markets, many companies have not had to deal as much as usual with late payments and insolvencies recently. But this situation will not last. With governments expected to begin phasing out state support this year, the challenge now facing CEOs and CFOs is how to spot high-risk customers and suppliers to protect their company against insolvencies. Identifying insolvency risks in a supply chain is critical, but what exactly do high-risk, Covid-sensitive customer and supplier companies look like and are they easy to spot?

How to spot signs of business insolvency risk and financial distress

When it comes to hunting for financial distress and insolvency warning signs among customers, you should ask the following questions about the companies you do business with. These points form a sliding scale which increases in severity. Generally speaking, the more questions answered with ‘yes’, the greater a company’s risk level.

  • Is your customer taking longer to settle invoices?
  • Have they asked to renegotiate contracts?
  • Is there a trend toward late deliveries… or even disputes?
  • Are funders refusing to support your customer during renewal facilities?
  • Have they attempted to switch to alternative funding sources?
  • Are their stocks performing badly? Are they being shorted?
  • Have the credit default swaps (CDS) prices increased? • Has your customer recently lost a major client/supplier?
  • Are they attracting negative press coverage?
  • Have any C-suite members resigned unexpectedly?
  • Is your customer unable to pay employee salaries/social charges?
  • Have they appointed restructuring advisors? 

Why you should focus on predictive protection against business insolvency risk

In the current economic environment visibility and awareness of risk is paramount. The situation is complex, so you need to have 360-degree visibility of what is happening around you and your partners. This means keeping a close eye on all of the factors that could lead to business insolvency and incorporating them into your trade relationship-management strategy. Achieving such a granular level of insight is not easy, especially for embattled SMEs who may find their resources stretched to the limit during tough economic times.

If you have trade credit insurance, remain in close contact with your insurer. More than information providers, they have skin in the game, so it is in their interests to give you the right levels of understanding to effectively manage the risk within your supply chains and recover potential bad debts. If you do not have trade credit insurance, we highly recommend you get coverage right away.

It would be a simplification to think a trade credit insurance begins and ends with premiums and pay-outs. The industry focus is increasingly on predictive prevention. In other words, an effective trade credit insurer will do everything within their power to identify high-risk trading partners and break the chain of potential insolvencies before it can start. When companies are faced with a chain reaction of insolvencies throughout global supply chains, data of this granularity will continue to provide the confidence to trade, and be paid, no matter what.

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