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Six Reasons to Trade with Financially Distressed Businesses

Feb 07, 2019 Red Flag Alert Updated On: October 9, 2023
Six Reasons to Trade with Financially Distressed Businesses

When decision-makers notice their business partner (either a current or a potential one) is financially unhealthy, their first instinct may be to cut ties and walk away. Sometimes this is the right call. After all, a business entering insolvency can drag others down with it. However, that is not always the best decision.

A financially distressed business can still be a valid partner, but you need to examine the situation from different angles and make the right commercial decisions. For this, you need data. This is where Red Flag Alert comes in – our software will highlight struggling companies and allow you to make well-informed decisions about the risk of trading with them.

There are different ways Red Flag Alert can help your business, but one of the key uses is in deciding whether to extend credit to a company, or trade with them in the first place. Our flag rating system will clearly show the likelihood of insolvency within 12 months.

In this article, we’ll examine why a bad credit rating shouldn’t automatically disqualify a business from being your trading partner. Specifically, we’ll look at six reasons why trading with these businesses can still be the right decision.

The Reasons

1. Low Marginal Cost

When you can deliver your service at a low marginal cost, your partner’s poor financial health won’t impact you as badly. For example, you may be a SaaS business and your costs are mainly fixed – servers, customer service, and so on – which means you won’t incur expensive variable costs for every deal.

Because of that, the other company’s inability to settle their debts on time will only mean some revenue lost. In other words, there won’t be a large variable cost that you have to write off.

2. High Margins

A lucrative contract with a distressed business may still be worth retaining. With high margins, even a few months of trading can allow you to turn enough of a profit to offset any potential losses you may incur in the future.

You need to calculate if you can earn enough money in the short term to make the overall deal profitable. You then need to make a judgement call on the risk versus reward of the client – Red Flag Alert helps considerably with this by providing detailed financial information.

3. Favourable Credit Terms

The amount of damage your client’s poor financial health can do to you will depend a lot on how your deal is structured. If little to no credit is involved, then the risk is significantly lower.

This is also where you can take active measures. If a company you’re currently trading with becomes less financially stable, re-evaluating credit terms may be the best course of action. You don’t necessarily need to sever all commercial ties, but you should safeguard your interests with appropriate credit terms.

4. Credit Insurance

One tactic you can use to mitigate risk is buying credit insurance. The right policy and favourable premiums can go a long way towards protecting your business.

Of course, any insurer will carefully analyse your business partner and their financial health before making an offer meaning this option won’t always be on the table. Still, if you do get a policy, double-check the fine print to make sure the payout terms are solid and that you can work with the proposed payout timeframes.

5. You Need the Business

While you never want to be reckless when choosing your business partners, being too conservative can sometimes have equally negative consequences. You may not always be able to wait for a company which is the picture of financial health.

If you decide to risk trading with a business in poor financial health, try to quantify the risk. Assess what would happen if you were to accrue the worst possible debt from a situation. Would you be able to survive such an outcome? If you could, and the benefits were worth it, then the circumstances might call for some risk-taking. It’s as the adage goes – nothing ventured, nothing gained.

6. The Company May Rebound

The fact that a business is currently in a bad way regarding financial health does not have to mean insolvency is inevitable. The situation may be temporary, and your experience with the company and knowledge of the industry can help you realise that.

For example, they may be on the verge of securing additional funding, or they could have a big contract in the pipeline. Red Flag Alert gives you the most detailed and up-to-date business intelligence – you should contextualise this with any other intelligence you have.

How Red Flag Alert Can Help

When you’re deciding whether to trade with a financially distressed business, this choice is never easy as there many factors to take into account. Often the first instinct is to pull away from the business but as we’ve shown, this isn’t always the best idea.

Red Flag Alert removes a lot of the uncertainty. By providing real-time data and highly specific predictive financial health ratings, you can start to measure risk accurately.

We use industry-specific scorecards to create our financial health ratings and then have expert analysts verify them.

With the combination of our health ratings and detailed financial information at your fingertips, you will have what you need to make informed choices. Financial distress does not have to signal the end of a business relationship, but you do need to have the right data to inform your decision-making.

Red Flag Alert offers:

  • Detailed information on every UK business.
  • 7 detailed financial health ratings.
  • 50,000+ updates every day.
  • 40+ important filters.
  • The ability to keep track of updates regardless of the time and location.
  • Updates direct to your CRM.

Click here for a free trial and find out how Red Flag Alert can help your business today!

Published by Red Flag Alert February 7, 2019

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