Late payments can impact your cashflow and your business. It is good to be mindful of any warning signs that indicate your customers may struggle to make payments on time. By identifying these as early as possible, you can take action to protect your business from financial losses and avoidable risk.
What was once a stable customer could change over the course of time and you should not rely on past behaviour as an indicator of future performance. There are several areas you can look at for signs of trouble. These include the wider economic environment your customers and prospects are operating in, any information on their financials that maybe available and, for current customers, there may be some behavioural indicators.
Challenges in the local or global economy can put financial pressure on your customers and may compromise their ability to pay you promptly. Warning signs to look out for include:
1. Economic Downturn: In times of economic downturn even the strongest businesses can face unforeseen difficulties which may negatively impact their cash flow and potentially lead to them having trouble making payments on time. During these periods take time to reassess each of your customers and identify any risks.
2. Political Instability: Periods of political instability – such as the war in Ukraine or changes in government policies for your or your customer’s market – can lead to changes in the business fortunes of your customers. Geopolitical issues should be factored into your customer assessments and your analysis of their ability to pay.
3. Increased Competition: Market challenges, such as increased competition, could lead to decreased business activity or a squeeze in profit margins for your customer. Keeping an eye on news or updates about your customer’s industry will help you to stay aware of the challenges your customer may be facing.
When you look at the financial performance of your customers or prospects, some early warning signs that can signal problems with payments includ:
4. High Debt-to-Income Ratio: When looking at a company’s financials, a high debt-to-income ratio can be an indicator of cash flow issues and this, in turn, may cause some businesses to struggle to pay their bills or make payments on time.
5. Negative Cash Flow: Similar to a high debt-to-income ratio, a negative cash flow may mean your customer has to juggle their commitments – one of which could be paying you on time.
6. History of Financial Reorganisation: A red flag can be a customer who has previously filed for bankruptcy or has recently gone through a financial reorganisation process, or a change of ownership or owner type. These are clear indictors of a business in financial difficulty that may still struggle to pay their bills on time and may even be at risk of collapse. It’s also a good idea to pay attention to family businesses and any owned by investment funds. Family businesses can sometimes be unwilling to make tough decisions and fund managers may choose to make a quick decision to close a company, particularly if they lose trust in it. To protect your business from the risk of a bad debt from this customer, you will need to take additional credit management and risk mitigation measures.
7. High Credit Utilisation: If a customer is using a large portion of their credit limit or asking to increase this limit with you, this could be an early warning sign that they are experiencing financial troubles and may be unable to pay their bills.
8. Reduction in Business Activity: On the flip side if a customer's business activity decreases, this could be another early warning sign that their business operations are not running smoothly which could ultimately result in them having trouble making payments.
9. Slow communication: If a once reliable customer becomes slow to respond to emails or calls, this could be a sign that they are avoiding a difficult conversation about payments that they cannot make.
10. Changes in Payment Behaviour: Sudden changes in payment behaviour, such as reduced payments, skipped payments, or disputing things that have always worked well in your trade. This can be a sign of financial difficulty and is worth investigating
Good communication is key to the success of all relationships and trading relationships are no different. Stay close to your customer and markets. Talk to them about what is going on for them. Are they being impacted by wider economic events? Could more lenient credit terms actually help them to continue to trade with you more smoothly? Would it be safer to press pause on any credit sales for a period of time?
In addition, you can take steps to protect your trading relationship with credit insurance. Trade credit insurance pays you when your customer fails to. With the peace of mind that you will be paid, you can continue to trade with your customer and offer them credit as agreed with your insurer.
What’s more credit Insurance provides so much more than the insurance pay out and debt collection service when you suffer a non-payment. At Atradius, for example, we are continuously scanning the financial performance of all insured buyers (this includes your customers and those of all of our clients) on an ongoing basis. This means we can alert you to any changes in the potential risks from your customer base, as well as any warning signs from within the wider market or industry. In effect, this means we can help you with all the monitoring of all ten of the warning signs listed here.