How to prevent insolvency risk?

Insolvency is a real threat to all businesses, particularly those operating in distressed situations. Today, the delayed effects of trade disputes, political uncertainties, social tensions and even global health problems can also expose even the best-run businesses to the risk of insolvency. In this article, we explain this risk, how you can work on insolvency protection and how insolvency risk management services can help you.

Insolvency risk is the real possibility that a company will not be able to meet its payment obligations within a defined period - usually one year. It is also known as the risk of bankruptcy. A company's insolvency can result from a variety of factors, such as poor cash flow management, overspending or even customer default.

Recent economic disasters show that insolvency risk is not just the result of poor management: the global Covid-19 pandemic of 2020 and the war in Ukraine have shown that even the best-managed companies can face insolvency risk through no fault of their own.

The insolvency of a customer, especially if it is your largest customer, can have an impact on your own cash flow and put your business at risk. The insolvency of a supplier can also have serious repercussions if what they supply is more expensive or more difficult to obtain from other suppliers.

In the worst case, the loss of a vital business relationship can also lead to your own insolvency - the ‘domino effect of insolvencies’ in action.

Accurately assessing the credit risk of your business, your customers and your suppliers is the first step in protecting yourself against the risk of insolvency. Keep an eye on these warning signs:

• Drop in profitability: for example, are your sales falling or is the cost of goods sold rising?
• Drop in capitalisation (also known as ‘book value’): has your gearing fallen below 30%?
• Poor interest cover ratio: this ratio indicates that operating profits may not be able to cover interest charges.
• Weak balance sheet.
• Cash flow and liquidity problems: are your fixed costs or interest payments rising steadily, or do you have a high number or amount of outstanding payments from your customers? Use our liquidity calculator for businesses to assess how your cash flow is changing in the light of external factors such as falling sales, late payments or one-off losses.
• Operating margins: are they shrinking?
• Debt maturities, refinancing and ability to raise capital: on what terms can you refinance your debt? Can you call on the financial markets or your credit line to raise funds if you need to?
• Your order book: what does your future workload look like?

If your customers pay late or can't pay you at all, your cash flow is at risk. If your suppliers can't deliver materials on time, your own production will slow down, making it difficult to meet your own commitments. Keep in mind the warning signs of possible supplier or customer insolvency:

• Are they taking longer to pay invoices or make deliveries?
• Have they asked to renegotiate contracts, or to extend (in the case of customers) or shorten (in the case of suppliers) payment terms?
• Is there a tendency to dispute invoices or deliveries?
• Has your customer recently lost a major customer/supplier?
• Are they attracting negative media coverage?
• What is happening in their sector or country? This is part of the economic climate in which they operate and can have an impact on customer insolvency. See our country risk reports to find out more.
• In addition, keep an eye on newsletters or other media that may broadcast information about your customers: high staff and management turnover, difficulties in meeting payroll, etc.

The natural climate must also be taken into account. In recent years, extreme weather conditions, climate change events and the Covid-19 pandemic have interrupted business operations or shut down supply chains at an accelerated pace.

By taking the following steps within your own business, you can prevent risks and create protection against insolvency:

Insolvency protection is an inexact science given the myriad of risks that exist outside the control of your business. But if it is not addressed in time - for example with the help of insolvency risk management services - you could find yourself trapped in a downward spiral of insolvency risk.

In particular, when insolvency is the result of an unforeseen event, credit insurance protects your cash flow and significantly limits the damage caused by credit risk to your own business by providing compensation for bad debts.

We help you avoid bad debts, compensate you if they do occur, and provide you with additional insolvency risk services as part of the credit insurance cover, such as

1. Debt recovery, with the skills and experience to maintain an effective and ongoing dialogue with debtors and their legal teams, whatever the country or jurisdiction in which they operate.
2. Predictive protection by helping you choose the right customers and markets to avoid bad debts from the outset, thanks to in-depth financial analysis.
3. In-depth market intelligence, giving you 360-degree visibility of industry sectors and impending difficulties.N'oubliez pas que la rapidité de réaction est essentielle. L'idéal est d'identifier les signes avant-coureurs et d'agir avant que votre client ne devienne insolvable. L'assurance protection contre l'insolvabilité peut atténuer le risque d'insolvabilité du client, préserver le flux de trésorerie et vous aider à développer votre entreprise.

Don't forget that rapid reaction is essential. Ideally, you should identify the warning signs and act before your customer becomes insolvent. Insolvency protection insurance can mitigate the risk of customer insolvency, preserve cash flow and help you grow your business.