Early Warning Signs of Insolvency: How to Identify Problems Before It's Too Late?

Early Warning Signs of Insolvency: How to Identify Problems Before It's Too Late?

In an unstable economic environment, financial liquidity is the foundation of every company. Unfortunately, entrepreneurs often focus on debt collection only when the debt has already accumulated, and the risk of losing money becomes real. The true art of risk management is, however, the ability to recognize financial problems in contractors before payment delays occur.

At Egzekucja, with over 20 years of experience in debt recovery, we know that early intervention is the key to minimizing losses and effectively preventing debt. But what should you pay attention to? What "invisible" signals should alert you?

1. Changes in Behavior and Communication: The First Red Flags

Insolvency rarely occurs overnight. It is usually preceded by subtle changes in behavior and communication from the debtor.

• Avoiding contact: Sudden difficulties in getting in touch, lack of response to emails, delays in providing feedback, especially regarding financial matters. A contractor who was previously accessible and transparent starts to "hide".
• Inconsistent explanations and excuses: If your business partner suddenly starts making up new reasons for delays (technical issues, employee illness, system errors), it's a sign that they might be hiding something.
• Promises without coverage: Promising "payment for sure tomorrow" or "settlement next week" without real actions is a classic sign of stalling.
• Requesting new payment terms: Requests to extend payment terms, defer overdue invoices, or divide payments into installments, especially if they are frequent and not justified by objective market factors, should raise concerns.

Example: A transport company, regularly performing tasks for a steady freight forwarder, noticed that the contractor, who was always timely, suddenly started responding to phone calls only after several days, and payments for freight began to arrive a week after the deadline, explaining it as "problems with the accounting system". This was the first clear signal that something was wrong.

2. Financial and Operational Signals: Changes in Business Operations

Financial problems often translate into visible changes in the way a company operates.

• Delays in payments to others: If you hear industry rumors or notice delays in your contractor's payments to their other partners, it's a clear warning sign.
• Changes in personnel: Sudden and massive layoffs, especially of key employees, can indicate difficulties. Reductions in the accounting department can hinder payment processing.
• Decline in service/product quality: A company struggling with financial problems may cut costs, which often affects quality. This can be both poor-quality products and delivery delays.
• Lack of new investments or visible cost cuts: Withdrawal from planned investments, reduction of the fleet, closure of branches – all these can indicate serious problems.

3. Legal and Administrative Signals: Checking Formalities

Monitoring public registers and legal information is extremely valuable.

• Changes in the company register: Changes in management, ownership structure, company headquarters, especially sudden and unexplained ones, can be warning signs.
• Information from debt registers: Regularly checking databases such as KRD or BIG, even if your contractor is not yet in debt to you, can reveal their indebtedness to other entities. Our Contractor Verification service is invaluable in this process.
• Payment demands from other entities: If your contractor receives public payment demands (e.g., announcements in the Court and Economic Monitor), it's a sign that their problems are already serious.
• Initiation of restructuring or bankruptcy proceedings: In case of serious problems, a company may announce restructuring or bankruptcy. Monitoring this information (e.g., in court IT systems) allows for quick submission of your claims.

What to Do When You Notice Warning Signs?

Don't wait until the debt becomes a fact. Act proactively!

• Quick reaction and escalation of communication: Try to establish an open dialogue with the contractor. Ask about the cause of the problems, try to work out a solution together.
• Review of the contract and trade terms: Make sure your contracts are well-secured. Do they include clauses on interest for delay, or the possibility of terminating cooperation in case of non-payment?
• Increased monitoring of receivables: If you have concerns, increase the frequency of monitoring payments from this particular contractor. You can use the Receivables Monitoring service, which automatically sends reminders.
• Securing future transactions: Consider shortening payment terms, requesting advance payments, or additional securities (e.g., bank guarantees) for future deliveries.
• Consultation with an expert: When the signals become serious, don't hesitate to contact a professional debt collection company. Early consultation with Egzekucja experts will allow for an assessment of the situation and selection of the most effective strategy, before it's too late for debt recovery.

Remember, early recognition of financial problems in contractors is the key to protecting the financial liquidity of your company. Act consciously and proactively, and in case of doubts – use our years of experience.