Businesses are advised to protect cashflow as customer insolvencies have knock-on effect
Recent research from R3, the Association of Business Recovery Professionals, has revealed that one in four insolvencies are caused by companies’ direct clients, or supply chain partners going bankrupt.
This domino effect means that a firm with otherwise healthy prospects can see a huge decline in cashflow if a large customer is declared insolvent, leaving an unpaid debt.
When a business is wound up or declared bankrupt, each creditor receives a percentage of what they are owed.
However, this nominal amount is often not enough to shore up a company’s balance sheet, causing knock-on effects. These may include delaying the business’ payments to its own creditors, causing further disruptions in the supply chain, or reducing liquidity which could have been utilised to capitalise on growth opportunities.
Credit insurance policies provide peace of mind for businesses, regardless of their size and sector. The facility protects a companies’ working capital and issued invoices, allowing them to trade in confidence, without the fear of insolvent clients having a domino effect on cashflow and their ability to make the most of chances to expand.
Martin Walmsley, head of debtor insurance at Lloyds TSB Commercial Finance said: “Feedback from our debtor insurance customers suggests that having the policy in place is enough to reassure their clients that, if another firm in the supply chain fails, they will still receive payment.
“In this situation, the insurance protects existing customers and helps to cultivate new relationships. And, against the backdrop of a recovering economy, a healthy balance sheet and strong capital reserves are the most important assets for companies wishing to expand.”