Insight: one in four UK companies impacted by another company’s insolvency
A new study has revealed that over a quarter of UK companies have seen their finances suffer following an insolvency of a customer, supplier or debtor in the last six months.
The research from R3, the insolvency and restructuring trade body, found that the financial impact of the insolvency of another business was described as “very negative” by one in ten UK companies and as “somewhat negative” by 16% of those polled.
The figures reveal the so-called ‘domino effect’, where one company’s insolvency will increase the insolvency risk for others.
Andrew Tate, spokesperson for R3, explained: “No business exists in isolation, and every headline-grabbing corporate insolvency will have consequences for numerous other enterprises. In the worst-case scenario, the loss of a vital business relationship can lead to a company’s own insolvency in turn – the ‘domino effect’ in action. Recently, we have seen a string of insolvencies of high-profile companies, from Carillion to Toys R Us, which will have caused upheaval at other companies.
“After the news of the Carillion liquidation broke, for example, our members reported an immediate upsurge in requests for advice from companies with links to Carillion. Many retailers have hit the headlines as a result of their current difficulties, causing less visible struggles at other firms, such as suppliers and service providers.”
Some 38% of companies with a turnover of between £5 million and £24.9 million said the insolvency had a negative impact. For smaller companies with up to a £4.9 million turnover, the figure was 24%. For larger companies with a turnover of over £25 million, this rose to 30%.
Meanwhile, one ten firms said the insolvency of a counterparty had not had a material impact on their business, with just under half saying that none of their suppliers, customers or debtors had entered an insolvency procedure in the past year.
Tate added: “Any smart business knows it needs to mitigate risks due to insolvency in its supply chain or its customers through active monitoring of partners’ credit profiles, diversification where possible to spread risk, and through building strong relationships that can provide support when a major counterparty hits a rough patch."
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