Are you drowning?

We have all witnessed the impact the recession has had on the building industry, and although many businesses are hanging in there, the worry over the stability of customers’ and suppliers’ bank accounts is still a concern.

So how can you spot the tell-tale signs that a company you supply, or one that supplies you, is in financial difficulty? And what action can you take to protect your business? Here is some practical advice.

How do you spot the red flags?

It is relatively easy to tell if a customer or supplier is in trouble. If the company’s accounts and annual returns have been posted late, this may indicate cash flow is a problem.

If the firm’s management starts to avoid calls and does not respond to letters, or if the payments of invoices are taking longer to reach you, it may be time to put your guard up.

Critically, when payments begin to be made using post-dated cheques or your customer is not settling invoices until further work has been undertaken, it’s probably in trouble.

Are there ways you can legally and discreetly find out what the situation is without your customer being aware of this?

The best course of action would be to do some anonymous internet investigation. If the firm is trading as a limited company, you can do a search on the Companies House website. This could unearth useful pieces of financial information, all of which will help to build up a picture of the firm’s financial health.

Information that can be accessed includes: profit, loss and asset sheets, details of debtors and creditors, mortgages held and when the client filed its accounts (if this is not up to date it’s generally a bad sign).

You can offer to accept payment in instalments in return for an agreement to appoint your firm in the future

Performing a credit search is also a useful tool as it will unearth any outstanding court judgments. The credit search will also highlight any mortgages, debts, loans and credit cards and may reveal over-borrowing.

How can you retrieve what you are owed without damaging your relationship with the company?

In the first instance, communication and negotiation is the best way to approach this. Try to turn the situation into a positive one. If your cash flow will allow, offer to accept payment in instalments from your customer in return for an agreement to appoint your firm on future contracts.

If communications break down, it would be advisable to halt all work until the debt is settled. If the customer is a limited company, a demand for payment with a restrictive timescale can be issued as a precursor to a winding-up petition.

A winding-up petition is a formal request to a court for the compulsory liquidation of a company and although you can apply for this, it can be costly and there is no guarantee you will get your money back as a result. However, the mere threat of this action can often encourage a debtor to pay up.

If the company goes into liquidation what can you do to maximise the chance of you getting paid?

Legally your recourse is limited at the point a company goes into liquidation. However, to maximise your chances of some recovery, it is advisable to ensure your own contracts with third parties incorporate a strong Retention of Title clause. This protects any materials you have supplied, so if the company collapses before it has paid you for them, as long as you can satisfy a number of conditions and are able to identify the goods, you are entitled to retrieve those items.

A word of caution here: if you have received some money as a result of issuing a winding-up petition against a debtor company and the company then enters into liquidation on your petition, you may end up having to give this money back to the company’s liquidators, as the payment would infringe section 127 of the Companies Act 1986. This means that the money would have to go back into a central pot and then be split equally among all the creditors.

So while there are a number of ways you can prepare and protect yourself legally against risky customers and suppliers, good communication and paperwork are generally the first, and best, form of defence against financial uncertainty.