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How to Protect Your Business from Bankrupt Customers?
By Guest contributors for CEOWORLD Magazine Updated:June 17, 2009
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Surviving in today’s economy is dependent upon one thing: getting paid. Many small to mid-sized B2B companies are failing not because of a decline in sales, but because they do not have the cash-on-hand to survive if their customers fail to pay. In this economic climate, business owners have to plan for the worst in terms of their own finances, as well as take their customers’ financial situation into consideration.
The situation is this: In 2007, 99 “major” companies declared bankruptcy (according to BankruptcyData.com, which defines “major” as “publicly traded companies and selected private companies”). In 2008, 237 public companies declared bankruptcy, a startling 240% increase. In five months of 2009 alone, 135 companies have declared bankruptcy and unfortunately more are expected.
However, one increasingly popular way for SMBs to protect themselves from being subject to a customer’s failure to pay is by outsourcing their accounts receivable. Here’s some background on how outsourcing AR works and the implications it could have on the health of a company:
Know Who Your Customers Are
Credit management vendors that outsource accounts receivable should implement an underwriting and credit verification process before verifying invoices so that businesses immediately have a transparent look into the creditworthiness of their customers. As a business owner, having this insight helps you avoid selling to someone who might not pay on time – or at all.
A business’ credit management provider should also maintain an ongoing credit monitoring system with its customers to help establish a credit policy that includes trade credit limits, payment terms. Having an understanding with customers about the extent to which you will lend helps ensure a healthy business relationship and protects against unpaid invoices.
Put the Burden on Someone Else
Similar to a B2C company accepting a credit card for payment, outsourcing accounts receivable puts the invoicing burden on the credit provider. By working with financial institutions, the credit management vendor borrows against your AR, takes on the debt and provides you with the capital upfront. In some instances, businesses get paid in as few as four business days, which eliminates the hassle of slow paying customers while also increasing a business’ cash-on-hand.
Businesses Have More “Insurance”
By outsourcing AR, businesses are often guaranteed a certain percentage of each sale, thus providing “insurance” for their invoices. In addition, in the event that a customer does go bankrupt, the business is protected and will still get paid. For certain credits, credit insurance backs each sale for up to 90-100% of the amount of the sale made.
Consider this:
It generally takes a small business 56 days to get paid by its customers. For a company selling $20,000/week, that’s eight weeks of sales outstanding, which equals $160,000 in untouchable assets. What would the difference be for a company of this size if, instead of risking that amount, it could have guaranteed access to 90% of that capital within 3-4 days rather than 7-8 weeks?
The economic crisis has affected almost every sector of the US economy but there are a few steps B2B companies can take to protect their businesses from losing money this year. Business owners should take into consideration the credit worthiness of their customers before making sales and have a backup plan in place to prevent a loss in revenue from buyer bankruptcy. In today’s market, it’s important to understand the consequences of the business relationships keeping a company afloat and although it’s possible for companies to grow under these circumstances, having an added layer of protection certainly helps.
By: As founder and Chairman of FTRANS, John B. Hayes brings over 30 years of experience in developing technology-based companies that help businesses manage their finances. John was also co-founder and president of the company that built Peachtree Software products, the first microcomputer accounting software. He recently published a book entitled, “Use the Credit Crisis to Grow Your B2B Business: A Proven Strategy for Enduring Competitive Advantage and Business Growth, Especially in Times of Crisis or Recession.”
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Glen Scheer
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