Senior director of Business Expert, Mike Smith offers advice on how to protect your business against a supplier going bust

One of the hardest things for any business owner is having to stand by and watch an otherwise successful business fail simply because a supplier goes bust.

The collapse of a supplier can have serious consequences for your own business’s health.

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It can leave you unable to fulfil your orders, potentially leading to lost sales, cash-flow problems and even an insolvency situation that can force the closure of your business.

Thankfully, there are a number of steps you can take to protect your business. Here’s our quick guide.

1. Monitor supplier stability

With thousands of small and medium-sized businesses going bust every year, it’s essential you build relationships with firms you can trust.

There are a number of low-cost ways you can check the financial stability of suppliers.

The Companies House WebCheck service allows you to access top-level information about a company for free, while risk audits and business monitoring services provided by credit reference agencies can give you a more detailed picture of a business’s performance for a small fee.

2. Think of worst scenario

When you’ve found a supplier that you think could be great for your business, the temptation might be to sign on the dotted line immediately. However, you should think about the potential problems the supplier might experience first.

That could include anything from quality issues to bankruptcy. Then ask for the contract to be amended accordingly.

For example, make sure you can get out of a contract without any financial penalties if there are signs the supplier is struggling financially.

3. Always have a backup

It might be simpler to work with a single supplier but it also increases your risk.

You can reduce that risk by having at least two suppliers for a core product, or at the very least, having an alternative supplier in mind if things were to go wrong.

If a supplier does fail and you don’t have a backup lined up, speaking to trade associations, going to trade shows, finding out who supplies competitors and even asking your bank for recommendations can help you find a replacement.

4. Consider insurance

There are insurance policies out there that can protect your business against service interruption.

If you’re unable to fulfil your orders for a period following the collapse of a major supplier, the insurance payout will help to keep your business afloat.

An additional insurance policy will impact your profit margins, so it’s something to consider carefully before you make your decision.

5. Pay more in short-term

If your existing supplier fails, be prepared to pay more for a replacement. However, you may be able to negotiate a cheaper deal over time.

Ideally, you’ll have some cash reserves to help you meet that additional cost.

If not, an additional line of credit could help you overcome what is hopefully just a small bump in the road.

Also read how to guard your business against credit card fraud.