Are you confident that you could spot a sinking ship?
Last year saw a huge 24% increase of businesses closing their doors compared to the previous year. Given the uncertainly within the UK economy after Brexit, an increase in failures was not surprising; but knowing who would be effected wasn’t necessarily clear.
We’d all like to think we could spot a failing business, whether it’s from their negative balance sheet and falling profit margins or even severe innovation stagnation and high staff turnover. Looking out for these signs will definitely help guide you, but these aren’t the only indicators that a business is heading in the wrong direction.
A company credit report can tell you so much more than you think you need to know and there are a number of other less obvious signs that you should be looking out for…
Change of directors
Director movements is a key piece of information we share with you on our company reports, so be sure to utilise this data and look out for any company with a high turnover of directors. Whilst it’s natural for directors to change occasionally within a business, if this is becoming a trend rather than a one off, or a director isn’t replaced within a few months, it might be a sign of deeper issues within the business.
Directors with failed ventures
The history of current directors could also help you foresee the future of their current business. Be mindful of directors with a high number of failed ventures in the past; this may be a sign of their incompetence and the increased likelihood of their current business failing too. This is particularly relevant to new businesses whereby if a director has been involved in a company that has failed in the last 3 years, they are 9 times more likely to fail again compared to a director who has never been involved in a failed business.
Adverse payment info/reviews
Have you noticed an increase in the number of days a customer is taking to pay their bills? This could also be a warning sign, and an indication that you need to be checking their credit report. Large companies that pay 70% of their bills late are nearly 4 times more likely to fail than those who pay on time. Be sure to look out for whether their average Days Beyond Terms (DBT) has increased, or if the company seems to be picking up CCJs more frequently. Both of these can be suggestive of a business struggling with cashflow and are unable to pay their bills when they’re due. Actively working with companies that are heading into this state can have a knock on effect to your business, and in more advanced circumstances, could result in your firm incurring bad debt.
Their enquiries trend has spiked
A lesser known, but useful indication is when a company is experiencing a rise in the number of credit checks being run on them. As soon as a company starts becoming suspicious of another business heading into disrepair, it’s only natural that they would check the current status and likelihood of the company in question becoming insolvent. The best place for them do this is via a company credit report, hence how this could result in a spike of views for struggling companies. This may be due to other circumstances, but is often prompted by negative press or worrying behaviour.
Linked businesses with a low credit score
As many companies are owned by or have linkages with other businesses, their activities and financial circumstances can have a knock off effect on one another. For this reason we always advise searching for and checking companies linked to the one you are looking to work with. Included within Creditsafe’s company reports are details of all linked businesses and other companies within the Group Structure. Be mindful if linked businesses have a low credit score or looks like it is in financial trouble, as their failure could indirectly impact their sister companies too.
When running a company credit check it’s crucial to read between the lines as well as looking out for the more obvious warning signs. A company won’t overtly reveal that it is heading into decline, so you’ll need to do your own robust research and on-going monitoring throughout your partnership.
With Creditsafe’s Risk Tracker we can automate your monitoring process. For each business you choose to follow, we send you alerts every time something changes within their report; from a director leaving to the company receiving negative publicity in the news.
By looking out for all the areas covered, spotting risky businesses will definitely be easier, but this certainly isn’t a definitive list. For more hints and tips on how to improve your due diligence measures speak to one of our advisers on 02920 556 800.