Signs indicating a company's financial difficulties and risk of insolvency

The consequences of insolvency usually occur as payment problems, legally fixed through an insolvency application and/or legal protection process. If the situation has already occurred (or we initiate the process ourselves), that is a different topic; here we are talking about preventive research in order to change the terms of cooperation or partners in a timely manner - for example, by switching to prepayment.

Register data

Public data allows you to notice risks in a timely manner:

• Annual reports are available in the UR system (https://info.ur.gov.lv/#/data-search; with the authorization of a natural person – free of charge);
• Annual reports and other data for a fee also on firmas.lv and lursoft.lv;
• Without authorization, you can see entries in the Insolvency Register (https://maksatnespeja.ur.gov.lv/insolvency/search/lv);
• You can check tax debts in the SRS database (https://www6.vid.gov.lv/NPAR).

These are signals, not evidence. However, they give you the right to take action – to contact a partner, expand your research and protect your interests.

Financial indicators – the strongest signal

In my opinion, it would be good to assess the partners’ problems and/or risk level before they have led to insolvency consequences.

Before the consequences reach the court, delayed or failed settlements, the partner’s annual reports often show signs of:

• A decline in turnover over several years;
• Long-term losses, inability to work with profit;
• Negative equity;
• Low liquidity (lack of working capital);
• Annual reports are submitted late.

Signs in themselves do not mean that the company is in financial difficulties, but in the partner’s analysis, it is important to identify the signs and find an answer – whether the risk is high.

To combine features into one scale, credit ratings are used in the world. Large companies, companies that want to issue high-class publicly traded securities, and banks also order a credit rating. Similarly, as countries do. Credit ratings are issued by a number of agencies and the rating level, among other things, characterizes the probability of a creditor going bankrupt - the data comes from historical statistical data, analyzing both the financial statements of these companies and the business as a whole. For example, Luminor reported on April 30, 2024 that the international rating agency Moody’s Investors Service (Moody’s) raised Luminor Bank’s long-term senior unsecured debt rating to A3 from Baa1 and its long-term deposit rating to A2 from A3, changing the future assessment to neutral. We will not analyze this in detail, since the aim of the article is to evaluate partners who do not order a credit rating on a daily basis, but we will only note that the rating is classically marked on a scale from a low D2/D to the highest AAA levels. The closer to A, the lower the risk.

Even without an official rating, you can get an idea using public data. In our region, the free calculator from Professional Partner OÜ is useful: https://www.infoproff.com/lv/credit-opinion/calculator.

Practical examples: When selecting cases in the Insolvency Register, I chose a large construction company (annual reports until 2022 are publicly available). The tool calculated a D rating with a 92.03% probability of default in 12 months; the reports were submitted with a significant delay, and the company was later declared bankrupt. The tool also showed a similar result (D, 92.03%) for a small meat processing company, for which the process was initiated in August 2025 - despite the increase in turnover, there were several years of losses, negative equity and low liquidity.

Conclusion: a synthetic rating is also a valuable early indicator. Limitation – annual reports are usually available with a significant time lag, so daily behavior and industry background must be observed in addition.

Changes in partner behavior

Not all financial problems will immediately show up on the balance sheet. However, you may notice signs of difficulty in your day-to-day dealings with your partner. Your company may become erratic in its interactions with customers, suppliers, and employees, trying to hide or solve problems.

The following signs are worth looking out for:

• Payment delays, regular requests to extend terms or restructure debts. If they are occasional, accidental, then the problems may not be critical yet, but in any case there is a signal. If it comes to requests for debt restructuring, systematic payment delays, then there is great reason to worry that the partner will become insolvent, for example, at the request of a creditor - the threshold is low;
• Unexpected discount requests, changes in transaction terms, delayed deliveries, partial payments;
• The rigidity of other suppliers' conditions (it is noticed that third parties in cooperation with your existing or future partner set stricter payment terms, such as prepayment, shorter terms, lower credit limits);
• Rapid staff turnover (the best leave first - this can be a sign of employee dissatisfaction with the company as a whole, or it can be a sign of financial problems);
• Sale of assets or urgent search for an investor in unclear circumstances.

Industries and External Factors

Even well-managed companies can run into trouble due to macro and geopolitical factors – construction cyclicality, export barriers, rising interest rates, etc. Be especially careful of riskier industries: they can have big jumps both up and down. Often, it is those working in risky fields that achieve particular success, but the outcomes can also be unfavorable.

What are the options for action when you notice warning signs?

Being proactive, seeing the problem and being aware allows you to control your risks. As a financial analyst, I can recommend some actions:

• Regularly monitor key customers/suppliers: tax debts, commercial pledges, financial indicators, reporting discipline, negative news.
• Diversify risks: reduce dependence, adjust conditions (e.g., advance payment, additional guarantees).
• Speak openly: direct dialogue with a long-term partner often helps to find solutions and reduce risk for both parties.
• Involve experts: lawyers and financial specialists help structure safer terms and an action plan.

• Plan B: be prepared for the worst-case scenario if a key partner becomes insolvent.

   

The most important thing is to be observant and analytical!

Signs of behavioral changes alone do not mean that the partner has encountered or is about to encounter financial difficulties. There is a possibility that a number of the above-described things are actually allowing the partner to strengthen and develop. There is a possibility that the poor financial results are already changing for the better, because the partner has coped with his difficulties. But be critically analytical – evaluate everything that is noticed so that you can manage your risk. There is no business without risk, but unmanaged risk can lead to the fact that you no longer have a business.

General checklist for monitoring partners:

A. Before starting cooperation:

• Check the registers: UR data (identification, officials, commercial pledges), Insolvency Register, SRS tax debts.
• Obtain 3-5 years of financial data: turnover dynamics, profit/loss, equity, liquidity.
• Evaluate litigation/claims (if public sources are available (google!)) and relevant cooperation agreements/guarantees.

• Determine the initial credit limit and payment term; provide a mechanism for reviewing the limit.

   

B. Contract security elements:

• Evaluate payment schedules, prepayment (full/partial), contractual penalties, late payment interest.
• Collateral (guarantees, commercial pledge, pledge agreement, insurance).
• Clearly defined delivery/acceptance conditions and rights to suspend/terminate cooperation in case of delays.

• Termination clauses (including “material adverse change” events).

   

C. Regular monitoring:

• Monthly: payment discipline, invoice turnover, percentage of delays; use of internal credit limit.
• Quarterly: interim results (if available), liquidity indicators.

• Annually: analysis of the new annual report; significant events (change of management, reorganizations), synthetic rating with public calculators.

   

D. If warning signals appear (operative action):

• Attention phase: shorten terms, introduce partial prepayment, reduce credit limit, request additional collateral.

• Alarm phase: full prepayment, suspension of deliveries until settlement, securing claims/legal action.

   

E. Documentation:

• Keep evidence: lists, reconciliations, delivery acts, payment schedules, internal decisions (credit limit, exceptions).
• Capture signals and decisions made (what, when, why) to justify action.

Contact us to find out if and how our expert knowledge can support and create added value for your business operations!