One of the most important things in any business is cash flow. Nearly every business out there bases their future planning to some degree on money that they have yet to receive. When a customer goes insolvent and files for bankruptcy, that can damage your cash flow, and your business, in a big way. The key here is not to panic, but to take swift steps to protect your own company’s financial well being. Including insolvency searches in your regular due diligence can help you reduce the impact of this situation on your business.
Here are a few ways you can prevent this situation, and how you can deal with it if it happens. Because even if you do everything possible to prevent it from happening to your company, there are always risks in business.
Consider Insurance
There is always a risk when you extend credit to customers, no matter how diligent you are about credit checks and credit control. There are insurance products available that will protect your business finances if something goes wrong with one of your customers, provided that you meet certain background check criteria, and it’s a good idea to consider them if you have a number of large account based clients.
Do Thorough Checks
Most of the credit insurance policies available to businesses have very strict regulations about how to conduct insolvency searches, reference and company background checks on potential account-based customers before extending credit. Whether you use these methods or not, there are very important steps you can take to protect your finances. These include:
- Careful credit reference checks. Make sure that you ask for commercial references, contact them, and verify that they are indeed bona fide companies. It’s not unheard of for companies to offer fraudulent references.
- Ask for and review recent financials, or ask for a bank contact person, who can verify the company in question’s liquidity and capitalization.
- Conduct insolvency searches and review past insolvency information for the owners and directors of the company. While a past insolvency that has been resolved isn’t an automatic disqualification from doing business with a potential client, it can be a warning sign.
- Never extend new clients high credit limits. Start small, and see how they pay their bills. It’s better to be on the hook for a small amount than to be left with huge holes in your cash flow if a new client goes under!
No matter how solid the company looks, or how friendly their representatives are, never skip the crucial checks when deciding whether to extend credit to a company. It’s always better to be safe than sorry, and if a customer threatens to go elsewhere if you do a thorough check, that’s a good sign that you’re dodging a bullet!
When Things Go Wrong, Be Proactive
Even if you do everything right, there’s still always a chance that something might go wrong in a few months or years. Nothing is ever completely certain in life or in business, and things happen.
If you’ve done your due diligence including insolvency searches, you may be able to avoid these types of situations, but if not, and a customer does declare bankruptcy, you will need to be proactive.
Insolvency is a legal process, and there will be a law or accounting firm, or some other type of professional, who will be handling the process. Be proactive, and as soon as you hear that there’s a problem, reach out to them and ask them how you should proceed. Chances are you will need to provide proof of debts, and when the insolvency is finalized, you will receive at least a portion of that debt.
