Six warning signs your supplier is going bust

The seesaw of insolvencies is in the ascent again. While the number of formal insolvencies had dramatically decreased by the end of 2010 compared with the previous year, the first two quarters of 2011 have shown that they are on the rise again. Bank lending is scarce, household incomes are being squeezed, inflation continues to rise, public spending cuts are now biting and the benefits of quantative easing are still anticipated. 

Against this background, you need to monitor your own performance, watch your competitors and keep an eye on the market – if the companies in your supply chain are struggling, it can have a domino effect. Here are some of the signs of increased risk to watch out for in your suppliers:

  • Product or service level issues: Look out for partial or missed deliveries, interruptions to service or suppliers seeking to reduce payment terms. These could all be signs of a business in difficulty.
  • Has your supplier introduced cost cutting measures? In particular, be aware of redundancy programmes.
  • Has your supplier gone through a refinancing exercise? A company in financial difficulty may seek to unlock cash flow by taking on additional lines of finance. Keep an ear open for financial market chatter as well as regularly checking the press.
  • Use all public resources available to you. Check the press as well as public registers. Changes at Companies House – such as new securities or incorporations – may indicate significant new financial arrangements.
  • Watch the management structure. As cash flow of a company tightens, the people you are used to dealing with may become more closely supervised, have their authority restricted or may disappear completely.
  • Other staff changes can indicate disquiet, so keep in regular contact with the company and its staff to gauge the general mood of the business. 
You also need to keep a close eye on customer behaviour. Watch out for customers exceeding credit terms, erratic payments or broken promises. 

As prospects for the economy continue to look far from rosy, it is worthwhile revisiting your own terms and conditions for future contracts. 

A properly drafted Reservation of Title clause would prevent title to goods passing to the buyer until they have been paid for (in other words, the goods won’t form part of an insolvency and be used to satisfy creditors). 

You might also want to consider adding financial penalties for late or non-delivery (provided it is a genuine reflection of the loss you suffer), or make sure that interest runs as soon as payment is missed.

Check the termination provisions to make sure you can get out of the contract if things start turning sour. Termination of the contract is one option, but always weigh up the pros and cons before serving that notice. The effect of termination may actually destabilise the supplier and push them into liquidation, or cause banks to become nervous and appoint an administrator. 

Be wary also of threats to terminate; market perception of a business which is threatened with losing a large contract, whether struggling or not, can have a detrimental effect and make both lenders and creditors nervous. 

Remember: if there are warnings signs that not everything is well with your current supplier, act swiftly and mitigate your risks. 

Lucci Dammone is a partner at Squire Sanders Hammonds.

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