Loss of liquidity or the insolvency of business partners is one of the most significant business risks ever. At present, this risk is aggravated by the COVID - 19 pandemic, which brings about changes in both the economic and political environment often resulting in debtors inability to pay their debts properly and on time.
Verification of the solvency or creditworthiness of a potential business partner is in the interest of any prudent entrepreneur. Such verification helps to identify potentially risky partners with whom cooperation may be problematic in the future. However, the creditworthiness check is also appropriate in the later stages of the business relationship, ideally on a regular basis (e.g. when making a decision whether to start enforcing at all or whether to continue to enforce claim, whether to continue to supply goods or provide services or how to determine the credit limit, etc.).
In the first place, it is necessary to detect negative signals, such as bankruptcies and restructurings, enforcement proceedings, debts and arrears, insolvency, etc. Equally important is the verification of the surroundings of the new business partner, namely whether it is not based at a risky address, as well as its ownership structure. There are a number of agencies on the market that provide information concerning creditworthiness of companies in Slovakia and abroad for specific fee. However, there are several ways to check a business partner from publicly available sources for free.
The first warning signal during verifying creditworthiness is the restructuring or bankruptcy of the company. The possibility to verify whether the company is in restructuring or bankruptcy is provided by the Bankruptcy Register or Business Journal containing information about bankruptcies, restructurings and debtor relief proceedings. Based on such verification, it is clear that if we find the company in one of the above lists, we will not enter into a business relationship with it. In case that our business partner is in restructuring or bankruptcy and we have outstanding receivables from him, we will make our claims in restructuring or bankruptcy proceeding.
It can be important to know whether your business partner is a party to the legal proceedings or whether enforcement proceedings are being conducted against him. Information about legal proceedings is available on the portal „www.otvorenesudy.sk“ or on the website of the Ministry of Justice of the Slovak Republic. Information about enforcement proceedings can be found in the Register of authorizations to carry out enforcement proceedings. One of the warning signals may be a lien established on real estate, business share or other assets of the inspected company. This information is available in the Notary Central Register of liens or on the Cadastral Portal (land register portal) where we can find out whether the inspected company owns real estate or whether the real estate is encumbered.
Another sign that our business partner is not reliable and has certain payment problems is the fact that he is on the list of debtors. There are different lists of debtors, such as:
- list of debtors maintained by the Social insurance company
- list of debtors maintained by health insurance companies
- General health insurance company, Inc.
- Union insurance company, Inc.
- DÔVERA health insurance company, Inc.
- list of tax debtors
In the event that your business partner constantly or repeatedly has arrears in the above-mentioned institutions, this indicates an increased payment risk.
The next option for verifying the solvency of a business partner is the analysis of its financial statements published in the Register of financial statements. This option is a bit more demanding, but the expert is able to obtain a relatively reliable picture of the liquidity of the entity based on data from the financial statements. In general, a company should have current assets (cash + bank accounts + receivables + inventories) at least to cover its current liabilities. This means that the ratio of current assets to current liabilities should be higher than 1 what express that the company has more liquid assets to satisfy current liabilities, and thus higher creditworthiness.
From the analysis of the financial statements is also possible to determine the total indebtedness. Companies use in their activities own as well as extraneous capital from which ratio we can find out to what extent the company is in debt. If the share of extraneous sources in total assets is higher than 50 - 70% we can talk about high indebtedness. We can also find out the value of equity from the balance sheet, which indicates the carrying value of the company's assets, while the value of equity should not be negative. In such analyses, it is important to take into account the conditions in individual sectors, the development of indicators over time, other financial indicators as well as the current economic situation. Naturally, from the analysis of financial indicators we can also determine other indicators evaluating the financial health of the company.
The history of your business partner can also show you his creditworthiness. The company, which has been operating for many years and has managed periods of economic recession despite changing conditions would probably has ability to stay in the market. Equally important are references, size, risk diversification, the country in which your business partner operates or its ownership structure. Some of these data are available in the Business register.
We have outlined several options for you to check solvency or creditworthiness of your potential business partner or debtor from publicly available sources. For more comprehensive information, it is possible to use the paid services of credit agencies or web portals, which publish summary information about the financial situation and creditworthiness of individual companies.