Commercial Debt Collections: Is Your Customer in Danger?

A comment to one of our recent blogs titled, 5 Warning Signs That Your Customer is In Danger of Falling Behind, captured our attention. We found the commenter’s words to be so insightful that we wanted to share them with all of our readers.

It has been my experience that if there is a change of ownership, you are too late. What is an early warning sign is if they change banks. That is why it so important to keep track of what bank your customer is paying their bills on. As their relationship with their old bank deteriorates they seek out another bank who does not know them as well. Get your bank to phone the customer’s old bank to find out what is going on.

If you are a primary supplier, you are not going to know until they are very close to the end that they are paying bills slowly, which is once again too late. You need access to how they are paying the smaller, expendable secondary suppliers who are the first to see the shortage of liquidity. This is why associations like the NACM provide a useful function. Few businesses pay on time, the average business on 30 day terms pays its bills at about 52 days. Some financially sound businesses see it as smart money management to hold onto their cash as long as they can and their leverage with the supplier allows it. No one likes losing a big customer so suppliers have to have some tolerance if they want to grow sales. What you look for is changes in the payment habit from one year to the next or one quarter to the next quarter, not that they are just slow. Of greater importance are the negative occurrences like N.S.F. checks, collections being placed by other suppliers and legal suits. By the time judgments are rendered it usually to late.

Of more importance than a decrease in customer orders is a big increase. They may be loading up on assets in anticipation of the bank coming in and taking over the business. Most likely the owner has given a personal guarantee to the bank and wants to make sure there is enough assets to cover his personal exposure.

In your experience with commercial debt collections, what would you add to the above comment? Post your thoughts here!