For many businesses, securing a large customer is a major achievement. Regular orders and a strong commercial relationship can provide valuable revenue, but relying on a significant customer can also create financial exposure if that business suddenly becomes unable to pay.

When a customer enters insolvency while invoices remain outstanding, the impact can extend far beyond the unpaid amount itself. Understanding that exposure and considering how it could be managed can help businesses become more resilient to an unexpected customer failure.

The Immediate Impact of an Unpaid Invoice

When goods have been supplied or services completed, your business may already have incurred much of the cost associated with fulfilling the order.

Materials may have been purchased, employees and contractors paid, products manufactured and deliveries completed. If the customer then fails to pay, those costs do not disappear.

The larger the outstanding balance, the greater the potential effect on working capital and day-to-day finances.

Pressure on Cash Flow

Healthy cash flow depends on money arriving when expected. A significant unpaid invoice can create a sudden gap between the money a business expected to receive and the commitments it still needs to meet.

This could make it more difficult to cover everyday operating costs or leave less cash available to deal with other unexpected expenses.

For businesses operating on relatively tight margins, the failure of a major customer can be particularly challenging.

Paying Your Own Suppliers

Customer insolvency can also have consequences further along the supply chain.

Your business may have ordered stock, components or materials from suppliers specifically to fulfil a customer’s requirements. Even if the customer subsequently becomes insolvent, you remain responsible for your own agreed payment commitments.

A significant bad debt can therefore put pressure on the relationship between a business and its suppliers, particularly where cash reserves are limited.

Meeting Payroll and Other Commitments

Businesses have a range of fixed costs that continue regardless of whether customers pay on time.

Wages, rent, utilities, finance repayments and other overheads still need to be met. Losing a substantial payment unexpectedly can place additional pressure on the funds available to cover these commitments.

This demonstrates why the financial consequences of customer insolvency can be considerably wider than one outstanding invoice.

Borrowing and Access to Finance

An unexpected shortfall may lead some businesses to rely more heavily on overdrafts, loans or other forms of finance to maintain normal operations.

Whether finance is available, and on what terms, will depend on the individual circumstances of the business and the lender involved. However, additional borrowing can create another cost at a time when the business is already dealing with the loss of expected income.

Delaying Investment and Growth

The effects can also reach into future plans.

Money that had been earmarked for new equipment, recruitment, premises, marketing or expansion may instead be required to cover the shortfall created by a customer failure.

This means an unpaid debt can potentially restrict growth even when the underlying business remains successful.

How Trade Credit Insurance Can Help

Trade Credit Insurance is designed to help protect businesses against financial losses arising when insured customers are unable to pay for goods or services supplied on credit.

Depending on the policy, protection can be arranged across a portfolio of customers or around particular buyers and credit risks.

Trade Credit Insurance can also provide access to information that helps businesses assess and monitor customer credit risk. This can support more informed decisions about who to trade with and the amount of credit to extend.

Understanding Your Exposure

It can be useful to consider what would happen if your largest customer became insolvent tomorrow.

How much would they owe your business? What costs would you already have incurred? Could existing cash reserves absorb the loss without affecting suppliers, employees or future investment?

Understanding the answers can help identify where customer concentration and unpaid invoices could present a significant risk.

Protect Your Business Against Customer Non-Payment

At W B Baxter, we can help businesses understand their credit exposure and explore Trade Credit Insurance solutions suited to the way they trade.

As part of Adler Fairways, we combine the personal service associated with W B Baxter with access to wider insurance expertise and markets.

Contact our team today to discuss Trade Credit Insurance and how it could help protect your business.

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• The cover available and policy features will vary between insurers and policy wordings. Specific terms, conditions, exclusions and eligibility criteria apply.
• The scope of cover, conditions, exclusions and limits will vary between insurers and policies. Businesses should review policy documentation carefully and seek professional advice where appropriate
• Trade credit insurance may not cover all circumstances and claims. Businesses should review policy documentation carefully and seek advice regarding their specific requirements.
• The suitability of trade credit insurance will depend on the nature, size and activities of your business.
• This article is provided for general information only and does not constitute advice. Whether trade credit insurance is suitable will depend on your individual business circumstances.