Protecting Your Business from Bankrupt Customers

avoiding bankrupt customers and clientsMany small businesses don’t have the time or resources to adequately monitor their own financial status, no less the ability to screen the finances of their partners, vendors, suppliers or customers. However, if SMB CEOs take away one thing from the current recession – it should be a clear understanding of how important it is to have a transparent view of their customers’ financial situation.

But with so many CEOs plagued with time, money and employee restrictions, how can they effectively implement the strategies to do so? Here are a few tips to help small businesses get started:

1. Evaluate Your Businesses’ Current Financial Standing – You can’t monitor your customer until you monitor your own business. First, determine your businesses’ spending habits and decide where you can cut back on spending and where you should invest. Then, decide where you stack up against competitors.

2. Identify Target Customers – In the beginning, entrepreneurs tend to accept any customers they can get. However, this often leads to bad debt – meaning you’ve sold (or lent in the case of B2B businesses) to customers that may not be able to carry out payment. Know which customers are most likely to pay invoices on time.

3. Manage Account Receivables – It typically takes a small business 56 days to get paid by its customers. For a company selling $25,000/week, that’s eight weeks of sales outstanding, which equals $200,000 in untouchable assets. If a customer goes bankrupt during this time, that money may be lost forever. There are ways to handle accounts receivables to prevent this from happening, however.

4. Protect Your Investments – SMBs should use a credit scoring model that qualifies customers by using front-end credit information to judge the credit-worthiness of a customer before a sale is made. This process is a precautionary step for protecting your investments and eliminates the need to buy blanket trade credit insurance on all transactions.

Daniel DrechselAbout The Guest Author: Dan Drechsel is the chief executive officer of FTRANS, an Atlanta based provider of accounts receivable and credit management solutions. He also serves on FTRANS’ Board of Directors.

5 Comments Protecting Your Business from Bankrupt Customers

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  2. Arthur Bland

    Dan,

    I too have encountered that problem when I could no longer collect my receivables because the borrower goes bankrupt. It’s really quiet difficult esp. if they have presented a good standing of cash budget before you approve their loans. :(

    – Arthur

    Reply
  3. Ken Kaufman

    Great tips. I would also add that of a customer is over 60 days past due and appears to be heading towards bankruptcy, you may want to offer them the option to create a note payable to you. That is the perfect opportunity to secure some collateral that you may seize should the customer default on the note. Since accounts receivables are generally not secured by anything other than a personal guarantee, if that, this is a great way to improve your likelihood of getting something, at least!

    Reply

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