What To Do if Your Customer Becomes Insolvent
If you have customers that pay you on a frequent basis for products or services, there’s a risk that your business could deal with the fallout of your customer becoming insolvent, specifically, that you’ll need to claw back any outstanding payments.
What is insolvency?
When a business becomes insolvent, it means that they have run out of cash to pay for the suppliers, products and services it uses.
Handling insolvent customers is difficult, essentially they do not have the money to pay what they owe, which can also put other businesses in a difficult position. Meaning their creditors may never receive all, or any, of the money they are due.
There are solutions available for businesses wanting to protect themselves from insolvent third parties. You can protect your accounts receivable by using trade credit insurance, or by contacting the customer’s insolvency practitioner you may be able to claim at least a part payment.
Protecting yourself from a customer’s insolvency
Data shows that 6% of businesses in the UK that became insolvent from the first quarter of 2009 were the result of a company’s customer becoming insolvent. A loss of a customer that makes up the majority of revenue can be exceedingly damaging to business, and serious cases can be a significant cause for insolvency for other companies.
Fortunately it’s possible to detect ahead of time if a customer has run into difficulties that could result in them becoming insolvent. Tell tale signs that a business is at risk of becoming insolvent is that they pay their bills after the date they are due. This is due to dealing with a limited cash flow.
You may find that you need to chase up invoices from a certain client or customer. It’s not good practise to pay invoices late, so this unusual behaviour is a sign that your customer may be struggling.
You may choose to also stay alert to news in their industry, or any articles related to their company. There may be hints that they are visibly struggling to maintain their business.
While these are not always accurate or tangible signs of your customer’s finances, they’re good indicators for identifying struggling businesses.
What to do if your customer has missed a payment
Occasionally your customers may fail to make a payment, which can seriously impact your cash flow. If a business fails to make a payment on the agreed date, you should take immediate action to learn why. It’s best not to aggressively demand a payment, the best course of action is a phone call to find out what’s happened.
As set out in the Late Payment of Commercial Debts (Interest) Act 1998, you are within your right to charge interest on late payments. This can be used as a way of ensuring your customers always pay their bills promptly.
When a business fails to make a payment after prompting, you can attempt to recover the money through legal action. Issuing a statutory demand means that you can grant a customer 21 days to pay, otherwise you can proceed with legal action.
After the three week period without payment or any legal action to respond, you may be able to wind up the company for debts of £750 or more. This is a serious approach, as it results in the liquidation of the company.
How To Handle Insolvent Customers
For businesses that are dealing with customers that have already become insolvent, there is a chance of not getting the cash that you are owed. If the company that owes you is liquidated, you could receive a small payment of what is contractually owed to you.
There are few options for you if a customer has become insolvent, but you can let the insolvency practitioner working with the customer know that your business is a creditor.
Your customer could propose a Company Voluntary Arrangement, which will ensure you receive part of what you’re owed.
How a customer’s insolvency could affect you
Losing a customer is unfortunately an almost inevitable part of business. In many cases it means also losing out on the money that’s owed to you. However, you should never allow it to affect your business to the point where it becomes insolvent itself.
You are far more likely to be made insolvent if your business relies on one main revenue stream. Ensure that you have multiple sources of revenue at all times, to ensure that you are never caught out.
Invest in applying for trade credit insurance, this will ensure you receive payment even if a customer becomes insolvent and is unable to pay what they owe you.
Although there are only a few options when it comes to dealing with insolvencies, your best option is to err on the side of caution and be prepared for the worst. Having an array of customers will avoid a single point of failure.