It can be shocking, crushing, and, worse, financially devastating to have a valued customer declare bankruptcy. However, the ambitious credit manager and business owner should strive to be prepared for the bankruptcy of a customer. Careful planning can mitigate or even negate the economic impact of a customer’s bankruptcy. Yet to fully prepare for the worst, it is necessary to have an idea of what might be coming. That is why it is important to recognize potential signs of a customer’s pending financial ruin.
Most credit managers and business owners are aware of obvious signals, such as increasingly slow pay, rampant changes in staff, and the death of a founder or key leader. However, there are many subtle things that should tip off the business manager/owner that something might be wrong. Here are some signs to watch for:
- Breakdown of relationships: a decrease in the level of professionalism and courtesy displayed by your customer may be a sign of problems. Broken promises and unreturned phone calls are examples of this behavior; on a larger scale, even an outdated corporate website could be such a sign.
- Industry trends: if companies similarly situated to a customer of yours are struggling or failing, you should keep a close eye on your customer. Although outward signs of trouble may not be evident, declining trends within the industry are a cause for concern, and a prompt to dig deeper.
- Lagging inventory levels: a slowdown in inventory could be evidence of cash-flow issues or other financial or structural distress. If possible, have your sales staff or drivers try to monitor fluctuations in inventory levels.
- Loss of a major account: obviously, it is bad news to learn that your customer has lost a key customer of its own. It would be wise to monitor how your customer reacts to this setback. Try to determine if your customer has a plan to overcome such hurdles.
- Financing issues: another sign of trouble is if banks or other creditors stop lending to your customer. Of course, depending on the circumstances, you may or may not want to follow their lead. Nonetheless, be aware of it.
- Pending major legal action: monitor closely any civil or criminal matters in which your customer is involved, as such events may greatly affect business.
- Regulatory action: be aware of the actions of those parties with the power to control your customer’s business.
- Media reports: be sure to investigate any reports of distress within your customer’s organization.
It takes simple measures and diligence to monitor these signs. To begin, cultivate strong relationships both with the customer and within your own company. We exchange information most openly and honestly with those we know and trust. Moreover, take the time and effort to participate in industry trade groups, which are likely to offer a collective level of knowledge greater than your own. Finally, follow the news, including that coming from journalist sources, and that coming directly from your customer.
Most importantly, please remember that if a customer does file for bankruptcy, there are ways to collect the account. Likewise, if you are faced with a preference claim from the bankruptcy estate, you may very well have defenses to the preference claim of which you need to utilize.