Business partners in financial distress

When a company experiences financial difficulties, this will have direct implications for all of its business partners. The financial distress of a business partner will bring financial risks to those it does business with. For example, in insolvency proceedings outstanding receivables are often not recoverable in full. So what should you do if a customer, service provider, supplier, landlord or tenant becomes insolvent or experiences some other comparable crisis?

Depending on precisely what type of partner is involved, a crisis can have various effects on your business and require different responses. There is no one single answer to the question of impacts, as they are often complex and closely linked to your own strategic positioning and priorities. The following questions can help you determine the answer: How important is this supplier for your business model? Can you prevent a stoppage in production? Can you replace your supplier at short notice if it is no longer able to work for you? Is this customer a significant revenue driver for your company and can you offset potential sales losses elsewhere? The answers to these questions will help you determine what the impacts will be and indicate specific responses to the financial distress of a business partner.

Prevention

Take precautions to ensure optimum protection for your company

It is essential that you act as early as possible to protect your company against the negative repercussions of financial difficulties in a business partner. There are various ways of doing this and wherever possible you should implement them before the first signs of difficulties appear.

By arranging security interests – if you are a supplier, for example, by including (extended) retention of title in your terms of business – you can prevent your products, precursors or tools from becoming part of the insolvency estate, after which you will only receive the insolvency dividend rather than the full amount of your claim. Security interests of this kind should be granted and set out in a contract at an early stage. However, it is important to bear in mind that forms of security which are popular in Germany (such as retention of title) may not automatically have the same effect abroad as they do at home. Therefore, if you do business with partners abroad, it is advisable to seek more detailed legal advice on this point to ensure that you are well protected if those partners experience difficulties.

Another way of pre-emptively protecting yourself is via active receivables management. If this reveals that your customer is no longer adequately meeting its payment obligations, you should take action and pursue your outstanding claims against that customer using means up to and including compulsory enforcement.

Correctly interpreting the warning signs of financial distress in a business partner

Often, there are warning signs that enable financial distress in a business partner to be identified at an early stage, giving you time to prepare. In this regard it is essential that you regularly check how “crisis proof” your business partners are. This enables you to control possible risks to your own business and avoid financial disadvantage.

One important sign of financial difficulties is changes in payment behaviour. A customer asking for a payment extension or instalments or a service provider pushing for shorter payment terms can be a sign of financial difficulties or impending insolvency. Major staffing changes, reductions in quality or cuts to the product or service range are also warning signs that absolutely must be heeded.

Behaviour in a crisis

Handling a business partner’s financial difficulty with Schultze & Braun

At Schultze & Braun, we have worked for clients in difficult situations for many years, and are therefore familiar with distressed situations from various perspectives – as insolvency administrators, as restructuring advisors to debtors, and also as representatives of the interests of creditors. We draw on this extensive experience to help you deal with business partners in financial difficulty and avoid repercussions for your company. We know what the signs of crisis are and how to interpret them. We will protect you and your company in good time against the insolvency of a supplier, customer or service provider. And because we know that every crisis can also bring opportunity, we can also support you in distressed M&A processes.

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Contact

Karsten Kiesel
Rechtsanwalt (Attorney at Law)

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