4 warning signs a business may be in financial distress
The reality of running a business is that, from time to time, a venture is not as successful as initially planned or hoped for. Failure is an unfortunate predicament that many businesses find themselves in and one that can trigger a domino effect of consequences for suppliers and customers alike.
Business owners should familiarise themselves with the warning signs of business failure to ensure that they’re adequately prepared if a customer becomes insolvent.
Four signs a company may be in trouble
- Late or missed payments
Often, the most obvious sign that a business is struggling financially is that supplier bills are paid later or worse, not paid at all. Even if payments are eventually made, an ongoing trend of delayed payment is often a reliable indicator that a company is struggling.
If a customer suddenly starts paying on time after a period of late or missed payments, suppliers should remain cautious. It’s not uncommon for struggling businesses to make a last-ditch effort to get their bills paid to try and save themselves from insolvency.
- Number of credit enquiries
A business in financial trouble may look to borrow additional funds to help them stay afloat. When applying for credit, a lender will perform a credit enquiry to assess the level of risk the business poses to them.
Enquiry patterns can be considered a lead indicator of risk. If a number of credit enquiries are performed in a short period of time, the lender will often see it as an indication that the business is struggling and desperate for cash.
- Changes to credit scores
The calculation of a credit score takes into account many things, including payment defaults and credit requests, as well as changes to directorships and number of credit enquiries.
A credit score predicts the likelihood of a business becoming insolvent and is a powerful indication of the financial health of a business. A credit score is usually based on traffic light colours: green indicating financial strength, orange meaning average risk and red meaning higher risk.
- Market trends
Depending on the nature of a business, the market in which it operates can often be a good indicator of a business’ success in the long run. However, this can be a double-edged sword – if there are too many players in the market, it can be harder to cut through the noise. On the other hand, if the demand for a product or service is not great enough, this can make it challenging to bring in the money.
The old adage ‘failure to prepare is preparing to fail’ rings true in business, particularly due to the domino effect that can arise in situations of insolvency. However, the fallout of customer insolvency can be minimised with adequate preparation. Getting into the habit of regular monitoring can help protect your business from significant loss.
Learn more about Equifax Small Business solutions at equifax.com.au/swiftcheck.
The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.