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Insolvency Explained: How to Protect Your Business from Unpaid Debts in 2025

For any company, recovering unpaid invoices is an essential part of ensuring the long-term future of your business. When an invoice goes unpaid, there are various solutions available to you, ranging from amicable approaches to legal action. However, if your customer turns out to be insolvent, the debt is often unrecoverable, and the financial impact can be severe if the amount is significant. That’s why protecting your business against the potential insolvency of customers (and even your own) is crucial. By implementing effective credit risk management, companies can proactively identify and mitigate these solvency risks, safeguarding their financial stability.

What is insolvency? 

 Insolvency refers to a situation where an individual or a company can no longer meet their financial obligations as they come due. For a company, this typically means its liabilities exceed its assets, put simply, it doesn’t have enough resources to pay its suppliers, repay bank loans, or cover tax bills. 

This critical financial situation generally leads to a declaration of suspension of payments, but insolvency is not necessarily synonymous with bankruptcy: rescue solutions can sometimes be put in place before reaching this extreme.  

 Once insolvency has been established and there is no obvious solution, the consequences for creditors are potentially damaging: depending on the size of the invoices concerned, their own financial health could be undermined. All businesses should therefore take steps upstream to cover the risk of customer insolvency, for example by taking out a credit insurance policy. 

 Immediate or widespread insolvency 

There are generally two types of insolvency:  

Cash flow insolvency, when a company is unable to pay its short-term debts due to a lack of available cash. In this case, an extension may be granted to allow the company to rectify the situation if its financial outlook is positive. 

Balance sheet insolvency occurs when the value of a company's assets is less than the value of its liabilities, which means that even if it sold all its assets, the company would not be able to repay its debts. This second case leads to bankruptcy. 

The main causes of business insolvency 

 To fully understand insolvency, and protect yourself from it, you need to learn to spot the situations and signs of risk. Caught up in the day-to-day running of a business, it's easy for a business owner to reach a point of no return before realising the seriousness of the situation. Several factors can lead a business to insolvency, and there are many combined causes. 

 Poor financial management 

Managing cash flow, making the right financial forecasts, adjusting the size of stocks: the financial management of a company is often complex, and the slightest mistake can have major consequences. 

 Over-indebtedness 

It may be tempting to take out loans with banks or financial partners to grow faster. Be careful, however, because an accumulation of loans can backfire and place the company in a situation of over-indebtedness, stifling its cash flow and preventing it from paying its debts to suppliers. This situation needs to be identified as soon as possible, so that a plan can be devised to spread the repayments over a period that is financially viable. 

 Lower revenues 

A significant drop in sales can make it difficult to pay debts. Loss of customers, loss of market share, increased competition: a company must always remain attentive and adjust its supplies as quickly as possible to changes in sales volumes. 

 Unfavourable economic conditions 

More unexpectedly, an economic crisis, sudden regulatory changes or a sudden rise in interest rates can have a negative impact on a company's financial health. 

 Bad strategic decisions 

Risky investments, poorly planned expansions or mistaken strategic decisions can also contribute to insolvency. Failure to adapt to market changes can precipitate this situation. 

Knowing how to protect yourself against insolvent customers or those at risk of becoming insolvent.  

To ensure the long-term future of your business, you simply need to avoid working with customers who are in poor financial health. Certain preventive measures will be highly effective: 

Solvency checks 

Before committing to new customers, it is prudent to check and monitor their solvency through credit reports, analysis of their financial statements or by asking for commercial references. Coface UK's  

Business Information Services, provides reliable credit data and insights to assess your customers’ solvency with confidence. 

Clear and precise contracts 

Contracts signed with customers must be clear, particularly about payment terms, which will include clauses on penalties for late payment and possible action in the event of non-payment. 

Proactive receivables management  

A rigorous debt monitoring system is essential for maintaining healthy cash flow, even when partnering with a reputable debt collection agency. Sending payment reminders before the due date, maintaining regular contact, and making immediate contact at the first sign of delay are key practices for understanding the situation and negotiating solutions. In cases where all follow up efforts have been exhausted and payment is still not forthcoming, placing the account with a trusted debt collection agency is a proven strategy to help secure payment.Our debt collection can support your receivables strategy and strengthen your financial stability. 

Taking out credit insurance 

Credit Insuranceprotects a company against losses due to customer insolvency. It generally covers a percentage of unpaid receivables and includes indemnification services.  

Diversification of the customer portfolio 

Depending on a limited number of customers is dangerous. A larger number of customers from as wide a range of sectors as possible is a source of protection for the company, making the failure of one customer or the crisis in one sector less of an impact. 

What to do when faced with an insolvent customer and an irrecoverable debt 

Despite all the precautions you take, it is possible to find yourself faced with an insolvent customer. Here are a few steps to follow in such a situation: 

1. Assess the Situation 

Confirm the insolvency status: Determine whether the customer is in administration, liquidation, or a Company Voluntary Arrangement (CVA) 

Review your exposure: Calculate the outstanding debt and assess the impact on your cash flow 

Look for Retention of Title (ROT) clauses that may allow you to reclaim goods not yet paid for by the debtor, it could be an efficient way to minimise your loss 

 2. Contact the Insolvency Practitioner 

Once appointed, the insolvency practitioner (IP) becomes your main point of contact. Your company will need to submit a Proof of Debt form with supporting documents (invoices, contracts, delivery notes) to register your claim. Coface Debt Collection can assist you in this process. 

3. Stop Further Supply 

Cease supplying goods or services unless you receive explicit assurances from the IP that you will be paid.

4. Provisioning of doubtful debts 

The fourth step, which may be considered at any time depending on the debtor's confidence in paying what is due, is the provisioning of doubtful debts. This consists of admitting that there is a probability that the debt will not be recovered and preparing for this. In this case, the invoice is recognised and written down in the accounts using the following entries: 

  • Debit to account 416 (doubtful debts), 
  • Credit to account 411 (trade receivables). 

This makes it possible to measure the impact of the potential non-payment on the company's financial situation, and to take precautionary measures quickly. 

Doubtful debts should be distinguished from irrecoverable debts, which presuppose a definitive loss of the debt (and not a mere probability) and open the possibility of recovering VAT. 

5. File for VAT Relief and Write Off the Debt 

If the debt is overdue by 6 months, you may be eligible to claim VAT bad debt relief. 

Work with your accountant to write off the debt properly for tax purposes. 

6. Lessons learned and adjustments 

Finally, this experience should enable you to adjust your commercial practices to limit the risk of such a problem occurring in the future. Reviewing solvency verification processes, improving contractual terms and conditions, and strengthening receivables management are good reflexes. Use credit checks, credit insurance, and clear payment terms. Monitor payment behaviour and act early on warning signs 

When in doubt, use a specialist! 

If you're still unsure about your ability to recover outstanding debts, consider partnering with a reputable debt collection service. In the UK, assigning claims to a specialist provider can help you recover funds more efficiently, often on a commission basis. This allows you to focus on running your business while professionals handle the complexities of collection. 

Insolvency remains a significant threat to UK businesses, but with the right insights and proactive measures, it can be managed. Coface UK offers tailored business information, credit insurance, and debt recovery solutions to help you stay ahead of risk. 

👉You can also, downloadour latest UK Insolvency Report to protect your business and gain the insights you need to safeguard your cash flow and customer relationships. 

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