Five signals that a company is in financial difficulties.

Due to COVID-19, many companies have unfortunately ended up in financial problems. Sectors such as retail, hospitality and events are facing particularly difficult times. The current situation highlights the vulnerability of our economy, and shows that situations may occur to which entrepreneurs can no longer respond.

Sadly, 63 companies on average go bankrupt in the United States every day (2019 figure), leaving a trail of unpaid invoices and unemployment in their wake. Expectations are that the number of bankruptcies will rise in the coming years, although no precise estimates can be given at present. The fact is, however, that if one company goes bankrupt, this has a knock-on effect on the entire chain of companies with which it does business.

Not surprisingly, Business Credit Report Online has noticed that companies request credit reports more often than they did before the coronavirus pandemic. They do so in spite of the fact that the economy has shrunk, which has reduced the order book. Companies therefore not only order credit reports at the moment when they start collaborating with another company (new order), but also regularly check creditworthiness during the course of that collaboration. A company’s financial situation may change quickly, certainly at a time when the government is prepared to close shops and companies for periods of time.

You must therefore remain alert to signals that a company finds itself in financial heavy weather. In this way, you will not be taken by surprise but can remain in dialog.

In this blog we will share five clear signals that a company is in financial difficulties.

1. Has the company’s credit score gone down?
   
   The creditworthiness algorithm ensures that all factors of a credit report are taken into account and assigns a credit score to the company, so that potential customers or suppliers can assess the chance of the company experiencing financial distress.
   
   Therefore you must always ascertain whether the credit score in the credit report has declined. Our credit reports also contain a summary as to why scores rise or fall.
   
   
2. Has the recommended credit limit gone down?
   
   A company’s credit limit is the recommended amount of outstanding credit. You need to make sure that the total amount of outstanding invoices does not exceed the credit limit (creditworthiness). If the credit limit (creditworthiness) declines, this may be a warning signal.
   
   
3. Does it take a company longer to pay its invoices?
   
   Payment details show how promptly a company pays its invoices. You must always be alert for the speed with which your customer pays.
   
   As soon as a company finds itself in financial difficulties, this is reflected in their payment practices. There are companies that stop answering their telephone or replying to email messages, which is another signal that things are not well and increases the importance of consultation.
   
   
4. Multiple management changes?
   
   If there are frequent changes among a company’s senior management, this may be a sign of internal problems at a company. Discord and poor leadership not only have an adverse effect on business, but also cost a lot of money.
   
   
5. How stable is the company’s group structure?
   
   If your customer is part of a group structure comprising several companies, you may also want to check the creditworthiness of the other companies. This is because group companies are often known to support each other.
   
   The bankruptcy of another company within the group may have a domino effect on the company with which you are doing business. You must therefore be alert if the bankrupt company has outstanding loans. You must always be mindful of the performance of companies affiliated to the company which with you are doing business.

We wish you good health for yourself and your business.

Yours sincerely,

Business Credit Report Online Team (Samrate B.V.)