Even if you have an excellent working relationship with a customer who pays promptly, they could go bust or make a bad decision that directly affects your business. Despite their best intentions, if a customer doesn’t have the funds to pay you, you don’t get paid, and that could leave you at serious financial risk. What scenarios do you need to be wary of and how can you protect yourself against such an eventuality?
Whether your customer doesn’t have enough liquid assets to pay their debt to you (cash flow insolvency) or simply doesn’t have enough assets to pay what they owe full stop, an insolvent customer is a risk to your business and your cash flow.
If a customer declares themselves bankrupt, they will be under certain restrictions for the duration or unless they cancel their bankruptcy. This could leave them incapable of paying you for a while, exposing your business to financial risk.
If a customer simply fails to pay you on time, you need to know as soon as possible so you can make up for the financial shortcoming. They could have any number of reasons for not settling their debt, whether it is because the invoice was forgotten amongst a barrage of other to-dos or because they are also waiting on a payment. But while you’re spending time trying to figure out what’s going on, you’ll be delaying payments yourself or holding off growth ambitions.
Even if an inability to pay is just a temporary, the domino effect of late payments can have a serious impact on your business. Don’t expose yourself to being knocked over as soon as your customer falls. Protect yourself with credit insurance.