Home Finance & Investments 1 in 5 firms in North hit by financial ‘domino effect’

1 in 5 firms in North hit by financial ‘domino effect’

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1 in 5 firms in North hit by financial ‘domino effect’

Around one in five (19%) of Northern companies may have suffered a hit to their finances following the insolvency of a customer, supplier or debtor in the last six months, according to new research from R3, the insolvency and restructuring trade body.

The figures are evidence of the so-called ‘domino effect’, where the collapse of one company increases the insolvency risk for others. They follow a spate of high-profile insolvencies including that of Carillion, as well as a string of major retail and restaurant chains.

Just over half of all North West companies (52%) in the survey said they had experienced the insolvency of a company they did business with over the past 12 months.

Paul Barber, North West chair of R3 and a partner at Begbies Traynor, says: “No business exists in isolation. Every large corporate insolvency will have a knock-on effect and in the worst case scenario, will lead to the failure of others. While the difficulties facing retail and restaurant chains have hit the headlines, behind the scenes no doubt many of their suppliers will be struggling.

“Food and beverage suppliers, fit-out companies, leasing firms and commercial landlords are likely to be the worst affected in the current situation, and may be left with unpaid debts and facing the loss of a major customer. However, firms can often weather the storm and the insolvency and restructuring profession plays a major role in helping them to do so.”

Paul Barber says all companies should consider strategies to mitigate the risk of the domino effect and take early advice if necessary. However, he points out that the insolvency of a business partner is not always negative – 7% of North West businesses said it had had a positive financial impact on them.

“The insolvency of a counterparty is likely to affect every business out there at some point so prepare as best you can, with a contingency plan in place. Companies should monitor the credit profiles of their business partners, diversify where possible to avoid relying on any one source of revenue, and build strong relationships that can provide support when a major partner hits a rough patch.

“If you hear that a partner is in financial distress or is insolvent, calculate your potential exposure and seek expert advice immediately if it is significant. Consider also the opportunities – could buying the distressed firm help your own business? Can you pick up any new contracts or customers? The better prepared you are and the earlier you seek help, the more likely you are to survive and even turn the circumstances to your advantage.”