Debt Awareness

How to spot outstanding debt at companies in financial distress

Today, it is rather difficult to determine how many companies will go bankrupt, given the current circumstances in which we all find ourselves. 

The pandemic is putting up a smoke screen, as many companies are receiving support from the various local governments and agencies. Once these support packages are dropped, bankruptcies will follow and grow to unknown proportions. Financial experts therefore have a rather negative view of the future and predict a new financial crisis. A painful reminder of how fragile the economy really can be.

If we take a look at pre-Corona times, on average between 40 and 50 companies in Belgium go bankrupt every day, leaving unpaid bills, unemployment and disrupted supplies. The reality is that when one company goes bankrupt, it can trigger a domino effect for companies they regularly trade with.

Therefore, companies today (especially now) need to tighten their credit management and customer acceptance to keep their working capital, cash flow and liquidity under control. We do notice that companies obtain some sort of business information (mostly with some online research), only that this is not yet properly applied, not properly gathered, not used properly or misinterpreted by most companies. For example, companies fail to consistently monitor their regular customers. Yet 3 out of 5 bankruptcies are among the regular client base.

From the 322 requests we receive on average per month to test our credit & risk management solutions, 20% of the companies still do not use (credit) business information and obtain information sporadically. 70% use (credit) business information from time to time, but without really understanding the risk indicators. Only 10% use financial business information efficiently on a daily basis, including the understanding of their credit risks.

That is why we would like to share with you 5 indicators to spot companies in financial difficulties in order to minimise your outstanding debts.

Chapter 1

Identifying the warning signs

Circumstances change constantly: a company that is flying high one month can find itself in debt the next. One big customer going bankrupt can completely disrupt the cash flow, the liquidity (and therefore its working capital) of a smaller company.

It is therefore necessary to keep your eyes open for all the warning signs of a company in financial distress. The best way to keep an eye on your customers is, you guessed it, to check their company credit report.

A company credit report is full of important financial information, director data, negative information and other important company data. Most of the elements in a company credit report are there to analyse the performance, the decisiveness and the stability of a company. 

Most of the elements in a company credit report are there to analyse the performance, the decisiveness and the stability of a company.

We recommend you take a look at the following elements:

 

1. Has the company's credit score gone down?

A credit scorecard algorithm takes into account all factors of a company's credit report and assigns a score to a company in this way. Thus, the credit score of potential customers/suppliers tells you the probability that a company will fail in the next 12 months.

If a credit score goes down, then somewhere on the report is an indicator that something has gone down within this company. Creditsafe's credit reports give you a breakdown of why the score is going up or down, so you can easily find out the reason in our comments section. 

 

2. Has the recommended credit limit been reduced? 

A credit limit, if you work 'on credit' (=payment afterwards) towards your professional business relations, is the total recommended credit amount that can be outstanding at any given time.

This is a good indicator for businesses. If this amount drops, it can be a warning sign that the company cannot take up a certain amount of credit, which can indicate that the company is having trouble paying its invoices.

By paying attention to this indicator, you can ensure that you can negotiate up to a recommended limit.

 

3. Is the company paying its invoices more slowly?

Payment data or payment experiences show how well a company pays its invoices.

If the company is in financial difficulty, their payment behaviour is usually one of the biggest signals of a downward trend. If they are struggling within the company, this will usually manifest itself in a delay of their payments. 

Via Creditsafe, the payment data will show you how many invoices were paid within the respected payment terms, were paid late or are still outstanding. It will also give you an average 'Days Beyond Terms' or 'DBT score'. This is the average number of days a company is still due, after the invoice deadline, until the invoices are paid. The 'DBT' thus helps you to adequately adjust your payment terms per customer or risk category.

 

4. Does the company have a reputation or a history of director changes?

A high turnover of personnel at top level can indicate internal difficulties within a company. 

For example, if a new director is appointed regularly, this may indicate that there are problems within the company or that there are differences of opinion at the highest level. This may lead to problems with staff, disrupting workflow and ultimately harming the company. 

Be alert for directors and their terms of appointment. Also note that if one of the directors has a previously failed company, this can be an important indicator of how they do business. 

Always conduct due diligence checks on directors of companies you are dealing with. Through our platform, you can easily investigate the various directors (and their background), whether they are politically exposed persons (= PEP) and whether they are involved in fraud, money laundering and the financing of terrorism via adverse media results.

 

5. How stable are the companies they are connected to?

If your customer or supplier is part of a group structure, always check how stable the other companies are within this composition. 

It is very common for companies within a chain or companies run by the same director(s) to shift profits to support each other. 

But as with many organisations, if one link breaks, the whole thing risks collapsing like a house of cards. A company that fails within the group structure can have a domino effect on the company with which you do business. 'Thomas Cook' is a good example of this.

Make it a habit to check the companies within a group structure as well. 

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Chapter 1

Daily warning signals

Sometimes there are no warning signs that a company is in financial distress, at least on paper. Therefore, there are other (indirect) ways to find out if a company is in trouble. 

Indirect ways to find out if a company is in trouble
  •  A change in communication

    If the regular relationship with your customer or supplier changes, this can be a warning sign.

    For example, if you are in regular contact with them and they start ignoring your emails regarding payments, this could be a sign that something is not quite right.

    Similarly, if they constantly ask you for a payment extension, this is a clear sign that there is not enough money.

    Finally, if you are constantly asked for extra goods and services, this may be a signal that they need extra resources to manage. So be alert for any changes in your relationship.

  • You can no longer get your contact on the phone

    Fraudulent companies and even companies that were once legitimate but are struggling will sometimes try to get rid of unpaid invoices.

    If your emails are bounced back or the phone is no longer answered, you should react quickly. For example, check if the company's website is still up and running or if possible visit their office to see if they are still active.

    If you are unable to reach anyone within the company and you have a late, outstanding invoice with them, you should definitely consider taking legal action.

  • Accounting or invoicing problems

    If your customer continually responds with the excuse that they are having accounting problems, this could be a warning sign that they are having trouble paying their invoices. Common excuses include that they have changed bank accounts, that they need to check the details with the bank or that their accountant is ill.

    Another common excuse is that there are problems with the invoice. The address is wrong, the name of the account holder is incorrect, etc. Not only does this slow down the invoice process. You also have to correct the invoice again, which again delays the payment.

These different signals should be kept in mind. 

Put it to the test

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This is a business service and is therefore only valid for business purposes.

We would like to keep you informed about the latest trends within our segment, relevant information, updates and tips & tricks by e-mail. Of course, you can unsubscribe at any time using the link in our emails.

Your data will never be shared with other external persons, companies and organisations.

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As the Global Business Intelligence Experts we help companies change the way they do business, by delvering company data exellence and the core of every business.

With credit information on more than 365 million companies worldwide, Creditsafe provides the most accurate and up-to-date information available in an easy-to-use format for companies of all sizes. All major credit insurance companies endorse Creditsafe, which means that our credit scores and credit limits are among the most reliable in the industry. 

Our ongoing investment in the creation and innovation of the world's most predictive credit score cards ensures that our customers know and understand the potential risks they cuold face. With this scoring model, we are able to predict 81% of bankruptcies 12 months before they occur in Belgium and an average of 70% on an international scale.

With 26 offices across 16  countries, Creditsafe provides direct access to 430 million credit reports for companies in over 200 countries worldwide and we are proud of our 95% customer retention rate.

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