What makes a debtor distressed
Distress is not the same as failure. A distressed debtor still trades, but the signals show it cannot meet its obligations on time: CCJs mounting, accounts overdue, cash cover collapsing, gearing climbing. It is the stage before formal insolvency, and it is the stage where suppliers have the most to lose, because they are still shipping goods on credit.
Why suppliers carry the risk
When a distressed company keeps trading, it does so on someone's money. Usually that money belongs to trade creditors: the supplier who ships stock on 30-day terms, the contractor waiting on an invoice. Every new sale to a distressed debtor is an unsecured loan. If the company fails, trade creditors sit near the bottom of the payment order.
How to spot them early
The signals are the same ones that precede insolvency, and they are all on the public record:
- CCJs appearing or going unsatisfied (see what a CCJ is)
- Accounts filed late or not at all
- A falling R-Score across successive filings
- Negative net assets or interest cover below 1x
- Directors resigning, charges being registered
On Black Flag Alert, companies in this zone carry a risk rating of 7–9 (High to Critical Risk). That is the band where credit terms should tighten before they are withdrawn entirely.
How to price the risk
Three options, in order of caution. Shorten terms: payment on delivery or pro forma removes the exposure. Reduce the limit: the profile's suggested credit exposure gives a figure derived from the company's financial capacity. Or walk away: a lost sale costs less than an unpaid invoice from a company that fails.
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