How to steel your business against supply chain insolvencies

Nearly every customer, and business, across the world has been affected to some extent by the supply chain disruptions in recent years. Remember the six-day Suez Canal blockage in 2021? That cost global trade almost $10 billion a day!

However, supply chain issues can be much more serious than disruptions and delayed orders. The current economic climate has led to a rise in insolvencies, which is impacting income streams within supply chains. Government figures show the number of registered company insolvencies in September 2023 was 1,967, 17% higher than in the same month the previous year.

But what are the risks that supply chain insolvencies pose to your business, and how can you pre-empt these risks and protect your business?

Why you should be aware of supply chain insolvencies

Insolvencies within your supply chain can have a serious knock on effect on the liquidity of your own business. All business leaders will rightfully worry about their customers going under. But you also need to consider the knock on impact of suppliers going under as well.

Our SME Confidence Tracker (click to download) found that almost half of businesses have seen at least one supplier (48%) or customer (42%) fold over the last six months.

It’s important to recognise the snowball effect that business failures could cause within your supply chain, whether direct or indirect. For example, if the supplier above your supplier goes out of business, this could mean that your own supplier will be impacted. As a result, you may be left unable to supply your customers with goods they have paid for - and you will be left short changed.

But while this is a scary prospect, the good news is that there are some steps that you can take to help protect your business from the risk of insolvencies within your supply chain.

Look for supply chain red flags

As well as ensuring that your own business’ finances are adding up, it is really important to be regularly monitoring your customers and suppliers finances. By looking out for early financial warning signs, you will be able to act quickly if something does go wrong.

While it will vary from business to business, some red flags to look out from suppliers include sudden requests to increase prices, while overdue products or payments can be a sign that one of your customers is in trouble.

Therefore, it is imperative that you remain vigilant so that you can protect your business from any supply chain finance issues. One way you can do this is to take a more critical look at your supplier’s balance sheet. For example, by tracking debt levels over time it can provide an indication on the liquidity of a business.

It is also important to take a thorough and meticulous approach when onboarding prospective clients and suppliers. Although finding the cheapest cost is important, evaluating the financial resilience of your suppliers is also vital for protecting yourself against potential insolvencies.

Stress test your business

Of course, prevention is better than cure. If the pandemic and the cost of living crisis in recent years have taught us anything, it is that huge challenges can crop up over-night, and sometimes without warning.

Unfortunately, we don’t have a crystal ball to allow us to predict what is coming our way, and when. However, you can prepare as best you can for multiple eventualities by stress testing your business. For example, test your business model against the scenarios that would likely unfold if one of your biggest suppliers or customers became insolvent.

Stress testing your business against wider economic challenges can also help you future-proof your business. For example, plotting different interest rate rises against your business’s debts is a useful way to understand how your business may be impacted.

Create a contingency plan

Once you’ve stress tested your business against various outcomes, use this insight to build solid contingency plans. Ensuring that you have water-tight contractual and legal processes in place to protect your business is of the utmost importance.

For example, if you already understand the impact of your main supplier going insolvent, and how likely this is, you can begin researching for a new back-up supplier. If the worst case scenario does happen, this means that you can more easily begin working with this supplier instead.

Where possible, make a provision for bad debt. Estimating the likely level of bad debt for a particular time period and setting aside a cash provision to cover it creates a buffer to help ease the blow of any shortfall from non-paying customers.

That being said, no matter how vigilant you remain, or how much insight you have, sometimes things can change overnight, especially in tough economic times. By understanding the risks that supply chain insolvencies and bad debt can pose to your business, you can use this insight to protect your business.

Additional options you could consider

Active monitoring and management of customers and suppliers is good practice. It may be worth considering how external finance can support your cashflow and also protect you in the event of a customer’s inability to pay. You can learn more about Invoice Finance as a solution to support your business cashflow. Bad debt protection can also be used alongside invoice finance to protect up top 90% of the value of the invoice in the event of a customer insolvency.