Member Article

Your Client’s Insolvency And How It Can Affect Your Business

A lot has been said recently regarding company insolvency. 2018 proved to be a substantial challenge for many, with the retail and construction industries facing notable difficulties. The closure of Carillion and worldwide giant, Toys R Us, only highlighted the financial issues plaguing many businesses. The latest insolvency statistics have also suggested the effects regarding company insolvency can run much deeper than originally thought.

Business Rescue Expert, a leading insolvency practitioner firm based in the North East, are sharing the knock-on impacts of one of your clients entering insolvency.

As mentioned above, the Q2 statistics for company and individual insolvencies in 2018 recorded a rise in the number of total insolvencies and, while there are slight improvements on the first quarter, the second quarter 2018 stats did not make for much better reading. In the first quarter of 2018, for example, the total insolvencies rose by 13%. The changes also seem to suggest a domino effect within particular industries.

A recent report by R3 - investigating the extent to which company insolvency can be felt across a sector - detailed that a quarter of UK businesses suffered a hit to their finances, all due to a client entering an insolvency procedure. This ‘effect’ can also be applied to regions, with a staggering fifth of Northern firms survey describing a client insolvency as ‘very negative’.

**What industries are suffering? **

We touched on the Carillion liquidation above, with the construction industry facing particular challenges in 2018. Construction firms are, currently, the most likely to suffer the knock-on effects of a client entering liquidation. There are many reasons as to why this industry is facing issues, such as the fall in spending and the weak growth in house prices. Similarly, the high competition within the industry contributes to the issues - especially if there are firms willing to undercut rivals and take on work for less than expected.

The retail industry is another sector that faced a stark 2018. Poundworld is a recent casualty of the high street, with their rival, Poundstretcher, also a star of a channel 4 documentary outlining methods to save their stores. Poundworld’s announcement led to the closure of their stores, and the losses of almost 2,500 jobs. Similarly, New Look began closing stores and House of Fraser was bought out of administration for £90 million by Newcastle United owner, Mike Ashley.To add to the worrying figures, the Press Association estimated over 50,000 jobs were lost in 2018.

**What is the cause? **

There are a number of issues contributing to company closures - almost too many to list. Higher inflation and an increase in business rate expenses are, certainly, factors. However, business rates are not, generally, the primary reason for insolvency. We have to look at the economy as a whole and the lack of growth within specific sectors, especially as we are tipped to have less money to spend than ever before.

Similarly, in the case of Carillion, overtrading can cause further problems down the line. In 2016, Carillion’s market value was estimated at £1 billion, with their plans to further expand their global offering. However, compare that to two years later, and their value stood at £61 million. Too many contracts may seem great in the short-term, but is not financially feasible if you do not have the resources.

**What can be done? **

While the figures are worrying, all is not lost. The potential for businesses to thrive is, most definitely, still there. If you are facing any potential issues or have noticed any significant changes in the market - seek advice. Catching your problem early will avoid any potentially devastating insolvency cases. For instance, you are in a better position to make an arrangement for payment with your creditors if you communicate from the very beginnings. Do not sink your head into the sand as you could face the likes of a winding up petition.

You should also look for alternative methods of finance to provide your company with the much-needed boost. Invoice finance, asset finance and even capital loans may be suitable. Your company may also benefit from a merger with a similar business within your particular industry. A merger is a potential boon for those companies suffering severe reputational damage, with the partnership likely to reassure many clients.

Ultimately, there are options for your company to place you back in the position you once were. We advise seeking advice, speaking to industry peers and researching all finance options.

This was posted in Bdaily's Members' News section by Robbie Thompson .