Around 17% of companies in Scotland may have suffered a financial hit following the insolvency of a customer, supplier or debtor in the last six months, according to new research from R3 in Scotland, the insolvency and restructuring trade body.

The Scottish figure is lower than the proportion of UK companies reporting a negative effect from the insolvency of a counterparty within the previous six months, which stands at over one in four (26%).

The report found the financial impact of the insolvency of another business was described as “very negative” by 8% of Scotland’s companies, and as “somewhat negative” by 9% of respondents.

The figures are evidence of the so-called ‘domino effect’, where one company’s insolvency will increase the insolvency risk for others. They follow a 28% rise in corporate insolvencies in Scotland in the first three months of this year compared to the previous quarter, and a spate of high profile insolvencies involving large companies such as Carillion and Toys R Us.

Across the UK, construction businesses were the most likely to say the insolvency of another firm had had a negative impact on their finances in the last six months, with almost half (47%) reporting a hit. Nearly a third (32%) of UK manufacturing companies and 31% of companies in the retail sector reported a negative impact.

R3 in Scotland Chair Tim Cooper, a partner at Addleshaw Goddard, said: “No business exists in isolation, and every headline-grabbing corporate insolvency will have consequences for numerous other enterprises. After the news of the Carillion liquidation broke, for example, R3’s members reported an immediate upsurge in requests for advice from companies with links to Carillion. Many retailers have hit the headlines as a result of their current difficulties, causing less visible struggles at other firms, such as suppliers and service providers.

“Regarding the challenges in the construction sector, official figures show that construction has been contracting over recent quarters, with weaker growth in house prices slowing output among housebuilders. Falling spending on infrastructure has reduced the sector’s contribution to GDP.”

Cooper added that the problems caused by the domino effect are generally ones that businesses are able to overcome with foresight and planning, albeit with a possible hit to future turnover and profitability.  “Any smart business knows it needs to mitigate risks due to insolvency in its supply chain or its customers through active monitoring of partners’ credit profiles, diversification where possible to spread risk, and through building strong relationships which can provide support when a major counterparty hits a rough patch.”

“If your business hears that a partner is in financial distress or is insolvent, calculate your potential exposure and seek expert advice immediately if it will be significant. You could also look to the possible upsides: could buying the distressed business help your own business? Can you pick up any new contracts or customers? Counterparty insolvency is likely to affect every business out there at some point so prepare as best you can, with a contingency plan in place.”