Four Signs Your Customer May Be in Financial Distress
Business failure is inevitable. It is imperative that you, as a creditor, protect yourself from a customer’s failure/default. Your best defense? Be proactive! Take advantage of secured transactions (UCCs and Mechanic’s Liens) and pay attention to signs of distress.
#1 Change in Corporate Status
Monitor your customer’s corporate standing with the Secretary of State, as a change in corporate status is an early sign of distress. Negative changes in status could indicate the company is preparing to close. Check out this testimonial:
“The customer business standing with each State is one early red flag signaling that something could go wrong with collecting accounts receivable. Using the service NCS has been providing, our company has already identified two accounts with open credit limits which could have resulted in material losses.
One of the accounts identified had $100,000 open credit limit and open accounts receivable. NCS notified us the account had fallen inactive with the State. Subsequent conference calls with our customer’s CFO found the customer was “very close to running out of cash and it is unlikely to be funded further by outside investors.” Given such dire status provided verbally as well as the State standing, we reduced the limit to $0.” — Credit Manager, currently utilizing NCS’ Corporate Monitoring
The dreaded contingent payment clause. In this case, it’s the infamous “I can’t pay you until I get paid” or “The check’s in the mail.” They may also say “We are waiting on financing from the bank. Once the bank loan goes through, we will pay you.” This is a sign of poor cash flow/lack of working capital…and it’s dangerous territory.
#3 Broken Promises
This is in line with “the check’s in the mail.” These promises include promises to pay, promises to contact you with updates on payment status and promises of quicker payment if additional credit can be extended. Empty or broken promises don’t pay the bills!
Silence is golden — unless you have a toddler or a customer with past due invoices.
Unreturned calls, unread emails, a disconnected phone number, undeliverable mail & email are all signs of silence. And, when money is owed, silence is never a good thing. When you no longer have your customer’s cooperation or, in this case, communication, it may be time to look at hiring a third-party agency or attorney.
Bonus! Part of knowing your customer, is also knowing who they do business with. If your customer’s biggest customer has filed for bankruptcy protection, it could easily impact your customer’s cashflow.
What Can You Do?
We’ve previously covered some tips on handling past-due receivables. Tips include closely monitoring open invoices (don’t allow days beyond terms to get out of hand), trying various methods of contact (phone, email, letter) stopping by their office (if able) to review credit reports and carefully looking for recent collection placements/judgments.
Lastly, stop extending credit. Don’t expose your AR to any unnecessary risk. If your customer isn’t paying their bill, then don’t give them the opportunity to make the debt worse.