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Five warning signs that a business is in financial trouble

Any business can experience temporary cash flow problems. However, as a creditor, it's important for you to spot the difference between a customer that's going through a rough patch and one that could be going bust.

Customer credit checks are useful. However, because they're usually based on historically filed financial data, they rarely give you an up-to-date picture. That's why it's important to keep a watchful eye on any customers who are late in settling their bills. This is particularly true in the current economic climate which is putting real pressure on business finances.

As a creditor, it's valuable to know how to spot the tell-tale signs that a business is in financial distress. If alarm bells start ringing, you can take proactive steps to reduce the risk of debt default, perhaps with the support of a professional debt collection agency. For example, you can aim to ensure you're at the top of the list for payment if limited funds do become available.

Here are some pointers which could mean that a customer is on the brink of insolvency:

1. Enduring cash flow issues
The most obvious sign that there's something amiss is if a company is constantly struggling to meet its financial commitments. If a business is consistently paying out more than it's taking in, it's already effectively insolvent, even if the owner, directors or partners haven't officially declared bankruptcy or begun a formal process of liquidation.

2. Late payment on a regular basis
It's common for invoices to get overlooked or for payment to be delayed for a while to ease cash flow issues. However, if this becomes a habit, it's a clear warning sign that there are underlying financial problems that could be much more serious than a temporary lack of funds. It could be that the business is over-stretched, under-funded, is not assiduous enough in chasing their own debtors or is facing insolvency. Ensuring your accounts team closely monitor the payment records of all customers is mission critical.

3. Loss of confidence
Always keep your ear to the ground. If you hear that one of your customers is rapidly losing regular business or has been barred from customers' premises, it's clearly common knowledge that they could be in financial difficulties. Remember, there's rarely smoke without fire. It's time to find out for yourself why their customer relationships are breaking down.

4. Overdue reporting
If the debtor is a limited company, you can check if they're late in filing their end-of-year accounts or confirmation statement with Companies House. This is a pretty sure sign that there's something wrong. There are serious penalties for late filing of accounts and, although that's not true for confirmation statements, the registrar could take steps to strike off the company, so it's not something that's done lightly. If the directors of the company fail to file accounts or a confirmation statement, they're committing a criminal offence, so they could be prosecuted and fined personally.

5. No response
If you've repeatedly tried to contact the debtor through various channels but you're getting no response whatsoever, that's a red warning light. It's probably time to submit a formal letter before action and then follow-through with legal proceedings.

Insolvency checks
All companies going through formal insolvency or winding up proceedings must publish a notice in the Official Public Record, known as The Gazette. You can check for the latest notices on The Gazette website.

The Government also has online searchable directories for company liquidations and personal insolvencies. You can check if a limited company is being wound up or is in provisional liquidation on the gov.uk website, or you can check for personal bankruptcy or insolvency using the Individual Insolvency Register (IIR).

Getting professional support and guidance
At Redwood Collections, we provide reliable and reassuring assistance for all your debt collection needs. We can help you stay on top of credit control processes to identify problem debtors and reduce the risk of late payment or debt default. Where a debt is overdue, we'll work efficiently and effectively on your behalf to do everything possible to recover the money you're owed. With Redwood on your side, your business can Grow Stronger.

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