The Symptoms of Company Failure: Advice for Credit Suppliers

Business failure can often be anticipated through careful observation and analysis of conditions prevailing in companies.  Failure is not an event; it is the result of a long process, which in many cases can be avoided. Impending failure is usually manifested through two symptoms:

• Financial Signs (must have access to the credit seeker’s financial statements);
• Non-Financial Signs;

For the purposes of this article, I will discuss ‘non financial’ signs as these are easier to observe or identify when dealing with a business/customer.

Non-Financial Symptoms

Conduct of Senior Executives

When a business experiences financial difficulties, the strain of the resulting pressure becomes more evident in the behavior and conduct of senior executives.  Some of these signs are a lack of candidness of management when creditors request information to approve or review credit facilities. Secondly, there is usually in-fighting amongst managers, which entails the apportionment of blame when the business fails to meet its commitments to stakeholders. Sudden and excessive withdrawals or resignations by key principles are typical indicators of a business in trouble. Alternatively and very often, key people become unavailable to answer questions or address stakeholder concerns – remember Enron.

Negotiating credit facilities with creditors

A company’s poor understanding of the purpose and size of the loan/credit facility required should serve as an alarm to credit granters. This may be a sign of desperation to take on as much credit possible that may be available from unsuspecting credit granters/suppliers. This goes hand-in-hand with seeking credit facilities or loans beyond repayment capacity. You may even find that the credit seeker accepts high cost finance or credit facilities at the peril of their business from willing credit providers. This is a definite concern. Finally, these businesses have the tendency to place undue pressure on a credit granter to approve facilities in a hurry. This is when you should expand the credit research process and delve deeper before making a final decision.

Other signs to look out for are:

• Desperation becomes evident in the company’s discussion with bankers, creditors and even staff;
•  Financial information is never available when requested;
• The big contract or equity injection, which will transform the company, is in the closing. These delays, caused by things outside the company’s control,  are common excuses for not meeting obligations;
• Financial pressure results in a buyer to request payment extentions. When creditors decline, new suppliers are frantically sought: this will result in a sudden influx of credit reference requests.
•  Paying creditors in round amounts is another sign of trouble that requires further exploration.
• Look out for changes in established habits, especially delays in providing Financials and other information.
•  Renegotiating credit terms, loan/credit agreement, repayment plan, etc. are sometimes indications of a company that is short on cash flow.
•  A business who seeks credit/loans based on the completion of a transaction rather than the net asset value of business. This may be arguable but warrants further exploration should it be accompanied by other adverse indicators.

In conclusion, knowledge of a customer’s affairs is critical when making credit decisions. It will also assist one when the crisis point arrives and put you in a much better position in relation to other creditors.