How to spot warning signs that say your customer is about to go bust

As a business, you rely on your clients and customers to pay you on time and ensure you’re always liquid. That’s why if one of them goes bust, it can represent a serious threat to your financial stability and put you at risk of going bust yourself.

You need to be able to spot the warning signs that say your customer is about to go bust so you can prepare a buffer.

  • Increasingly late payments: if a previously prompt customer starts struggling to pay up on time, they could have cash flow problems.

  • Management changes: if the top brass are quitting, the company could be sinking. Equally, a funded company where investors have clout could lead to the CEO being ousted from their own company with an interim executive parachuted in.

  • Asset sales: if one of your customers starts selling off big chunks of their business, they could be in financial trouble.

  • Scaling back: if a customer starts to scale back or cancel its growth plans, it might not have the means to see them though (or pay you).

  • Cutting marketing spend: if a business has been particularly prominent with above-the-line campaigns on TV, radio, billboards, the tube, and then stops, there is a chance it can no longer justify the expense or hasn’t seen sufficient ROI.

  • Pivoting: if one business model isn’t working, a company in trouble will seek to pivot to create a sustainable revenue line before it’s too late. This could mean going after an entirely new market, change to pricing strategy, or ‘re-packaging’ some aspects of what it already does.

  • Raising finance: a venture-funded company scaling fast with the funds it has raised will have a specific ‘runway’ and will either need to be sustainable before it reaches the end or will have to raise another round of finance. If you hear the company is fundraising again, this may all be part of the plan and a happy occurrence following milestones being hit – or it could well be a follow-on round from existing investors that don’t want to see their initial investment disappear into a black hole.

  • Spending big: conversely, some businesses will attempt to try to spend their way out of trouble, with a last roll of the dice.

Credit insurance can protect you against the changing fortunes of your customers, so their loss doesn’t have to be your loss. Euler Hermes also provides risk assessment services to alert you to potential problems with clients.