Recent data from May 2023, compared to the same period in 2022, reveals a staggering 40% surge in company insolvencies across England and Wales, resulting in the closure of 2,552 businesses in the past month alone. This unsettling trend has been exacerbated by a significant 38% increase in Creditors’ Voluntary Liquidations (CVLs), leading to the shutdown of 2,181 companies struggling with unsettled dues to their creditors.
The implications of this escalating insolvency crisis offer potentially far-reaching consequences, not only for the businesses directly affected but also for the broader economic landscape of the UK. For businesses dealing with other enterprises, the soaring insolvency rates pose a critical risk, potentially jeopardising the stability of their customer base and, in turn, their own financial well-being. The ripple effects of these insolvencies are also significant, as a looming surge in unpaid invoices can trigger a domino effect, ultimately leading to the potential downfall of suppliers unable to meet their financial obligations. Moreover, businesses entangled in contracts with insolvent companies may face an uphill battle as these contracts are subject to renegotiation or termination during the insolvency proceedings, ultimately impacting their revenue streams and future business prospects.
Yet credit checking is not undertaken as rigorously as you’d think (considering how important it is) or, if they are undertaken, it’s a one off event rather than consistent monitoring.
So what can SMBs do to mitigate these risks and maintain a better overview of their customers and supply chain?
Undertake thorough credit checks
Conduct comprehensive credit checks on potential clients, including reviewing their credit history, payment behaviour, and financial stability.
Utilise technology to monitor customers
Software such as Check-it from Know-it enables you to see when a supplier or customer’s status changes, raising potential red flags for immediate issues such as insolvency or financial issues.
Ensure clear payment terms and conditions
Clearly outline payment terms and conditions in contracts and agreements, ensuring that clients are fully aware of the payment deadlines, consequences of late payments, and any applicable penalties or interest charges.
Maintain regular communication
Stay in regular communication with customers throughout the payment cycle. This can involve sending payment reminders, invoices, and follow-up emails or calls to address any payment concerns or delays.
Implement early intervention
As soon as an invoice becomes overdue, initiate contact with the customer to understand the reason for the delay and work towards finding a mutually beneficial solution.
Offer incentives for early payment
Encourage timely payments by offering incentives such as discounts or rewards for clients who consistently settle their invoices before the due date.
Diversify customer portfolio
Spread the risk by diversifying your customer base, minimising the impact of potential payment defaults from a single client.
By implementing these proactive measures, SMBs can better safeguard their financial interests and minimise the risks associated with customers who may be unlikely to fulfil their payment obligations.