How to assess the risk of supplier failure and what to do if it happens

Exeter based food importer and distributor Avilton Foods has been in the press recently after entering administration in September.
It is reported that the business owes more than £200,000 to Fresh Retail Ventures, which is part of the Jamie Oliver group. As an unsecured creditor, it is unlikely that Fresh Retail Ventures will recover these monies from Avilton. This case highlights the importance of protecting your business against creditors or suppliers in financial difficulty.

Managing the risk

1. Know Your Supplier

• It is important to have a thorough knowledge of the business with which you are contracting.
• Research key suppliers on the internet, keep updated with the local press - know the business climate in the local area.
• Consider an online credit check service, such as Experian or Risk Disk. There may be a cost associated with using these services, but they are able to provide you with detailed and up-to-date credit information which can be a valuable tool when looking to assess real risk.

2. The Importance of Contractual Clarity

• It is vitally important that dealings with your suppliers are founded on clear contractual terms.
• Take care to avoid a "battle of the forms" - which can be a remarkably common occurrence where contracting companies both attempt to rely on their own, differing terms and conditions.
• Make sure to establish, beyond any doubt, the terms that apply.

3. Remain Vigilant!

• Be aware of any warning signs that your supplier may be in financial difficulty, or underperforming.
• Things to watch out for: rebranding; low staff morale; erratic payments; delaying supplies; and/or a switch to invoice discounting.
• In these situations, it is always best to conduct some further investigation into your concerns - be pro-active rather than reactive.

4. Have a Contingency Plan...

• If you are dependent on few suppliers, consider making enquiries of other suppliers in advance as a back-up.
• Your ultimate objective will be to minimise credit risk so far as commercially possible whilst maximising credit availability.

If the worst happens...

• Despite safeguarding your business as much as possible, at times the demise of your supplier can be unavoidable, especially given the current economic climate.In this situation, you must act in order to put yourself in the most advantageous position for your business.
• If the supplier has gone into administration, it may be worth negotiating with the administrator to achieve best possible outcome for your business.
• If a debtor company has entered into voluntary arrangement and you are keen to maintain an ongoing business relationship, you could try and be flexible and accommodating as regards the arrangement.
• If the insolvent company is a critical supplier, try taking a commercial view to maximise the possibility of the company continuing to trade.

For more information on these or advice on the issues highlighted above please contact David Thompson on david.thompson@michelmores.com