In a report by Creditsafe, it was discovered that 2025 saw 27,975 insolvencies. Although this is a 7% decrease compared to the previous year, it still highlights that insolvencies could become an issue in businesses’ supply chains.
Supply chains have become increasingly fragile in recent years due to inflation pressures, and supplier failure can send ripple effects across the chain, threatening otherwise healthy businesses.
In this article, our experts will help you to identify the warning signs of potential insolvency of a key supplier or subcontractor and outline practical steps to protect your business.
The Impact of Supplier Insolvency on Businesses
A wide variety of industries are being impacted by insolvencies, with the most affected being:
- Construction (17%)
- Retail and wholesale (15%)
- Hospitality (15%)
- Manufacturing (8%)
SMEs in particular are being disproportionately affected by insolvencies due to rising employment and business costs.
As a result, businesses along the supply chain are experiencing delays, contract breaches, cash flow strain, and reputational damage. This is especially concerning for businesses with a high dependency on single suppliers, increasing their vulnerability in the event of supplier insolvency.
What Are the Signs of Insolvency in a Supplier?
Early Warning Signs
The earlier you can identify the potential signs of insolvency, the better. A supplier in the early stages of insolvency risk will most likely show some of the following signs:
- Late deliveries or reduced service quality
- Requests for accelerated payment terms
- Frequent changes in payment details
- Staff redundancies or management departures
- Legal claims or CCJs
- Public financial distress indicators
Financial Red Flags
Changes in the way your supply manages its finances are one of the key indicators that it is at risk of insolvency. They might carry out one or more of the following:
- Overdue invoices
- Unusual discounting
- Persistent requests for contract renegotiation
- Breach of covenants
Sector-Specific Risks
Depending on the industry, there will be some specific signs to look out for that will help you to determine if the supplier is experiencing financial difficulty, such as:
- Construction: Subcontractor payment delays
- Professional Services: Unexplained staff exits
- Manufacturing: Raw material shortages
Potential Insolvency of Key Supplier or Subcontractor: What Should You Do?
So, what can businesses do to help prevent being impacted by the potential insolvency of a key supplier or subcontractor? If you suspect that one of your suppliers is at risk of insolvency, here are four steps you can take to protect your business.
Step 1: Assess Exposure
- Assess your contract value to understand your financial and operational exposure
- Start searching for alternative suppliers to minimise disruption
- Check what payments are outstanding and due
- Evaluate your retention clauses carefully to ensure you don’t breach the contract
Step 2: Review Contracts
- Check the grounds and notice requirements for termination to ensure valid action
- Determine whether you have the right to step in to complete the work
- Review retention of title provisions to clarify ownership of goods already delivered
- Review guarantees and other security measures that could protect your position
Step 3: Protect Your Position
- Avoid making early payments without assessing the risk
- Be cautious about preferential payments that could be challenged
- Consider escrow arrangements to protect funds while ensuring continuity
- Seek legal advice early if you suspect potential insolvency
Step 4: Contingency Planning
- Identify backup suppliers in the event of another insolvency
- Diversify your supply chain so you’re not dependent on one supplier
- Strengthen due diligence processes to help avoid risk in the future
Preventative Measures for the Future
These four steps will help in the event of a potential supplier insolvency, but how can businesses ensure these situations don’t happen again in the future? Here’s a practical checklist to safeguard your business against supply chain failures.
- Credit checks and monitoring services
- Stronger contractual protections
- Diversification strategies
- Supplier financial due diligence
- Ongoing risk reviews
How We Can Help
Insolvency levels continue to pose a significant risk to supply chains. We hope this guide helps you identify the early warning signs of potential insolvency of a key supplier or subcontractor, and take swift, informed action to reduce financial risk.
Seeking legal advice early is especially important to help prevent long and costly disputes, both for businesses and suppliers. At Harding Evans, our Business Recovery and Insolvency team can support in resolving insolvency disputes and court action with specialist legal advice.
Resolving insolvency disputes is often a complex and time-sensitive matter, so our team of industry experts work closely with all parties to encourage a successful outcome.
To find out more about how Harding Evans can support you during times of financial difficulty, get in touch with our Head of Commercial Litigation, Ben Jenkins, on 01633 760675 or at jenkinsb@hevans.com.
