How exposed is your business to one of your customers going under?
26% of UK businesses experienced a decrease in their finances following the insolvency of customers in the first 6 months of 2018, according to R3, the insolvency and restructuring trade body.
The research also found that the same insolvency also had a negative financial impact on businesses further down the supply-chain – the so-called “domino effect” – where a company’s insolvency will increase the insolvency risk for others.
According to Andrew Tate, President of R3, “No business exists in isolation, and every headline-grabbing corporate insolvency will have consequences for numerous other enterprises. In the worst-case scenario, the loss of a vital business relationship can lead to a company’s own insolvency in turn – the “domino effect” in action.
Andrew continues, “After the news of the Carillion liquidation broke, for example, our members reported an immediate upsurge in requests for advice from companies with links to Carillion.”
He adds, “The insolvency and restructuring profession has a role to play in helping to steady firms at risk of the domino effect, a task that would be easier with access to a more flexible set of tools, such as the business rescue “moratorium” proposed by the Government back in 2016. Despite the help a moratorium would offer a company dealing with a sudden shock, very little progress has been made to introduce it”
The negative effects on businesses haven’t been sector specific. Construction businesses have been the most likely to admit that the insolvency of another firm had had a negative impact on their finances in the last six months, with 47% reporting a hit. Wholesale and transport were the next-most affected sectors.
In terms of the sizes of companies that were affected:
● 38% of companies with turnover between £5M-£24.9M reported being negatively affected.
● For companies up to £4.9M, it was 24%
● 30% of the largest companies in the research (turnover over £25M) reported feeling the impact
But it’s Andrew’s final words that offer the most advice. “If your business hears that a partner is in financial distress or is insolvent, calculate your potential exposure and seek expert advice immediately, if it will be significant. You could also look to the possible upsides: could buying the distressed business help your own business? Can you pick up any new contracts or customers? Counterparty insolvency is likely to affect every business out there at some point, so prepare as best you can, with a contingency plan in place”.