Accounting and Taxes Articles

By Maria Valdez Haubrich

The economy is improving—or is it? In today’s roller-coaster economic environment, the risk that a key customer of your small business might declare bankruptcy is ever-present. How can you protect your business from a key supplier or customer’s misfortune?

Some steps to protect yourself should be taken before you ever take on a new client. If you haven’t already done so, make the following two steps part of your processes for every new customer:

1. Credit check: Each new customer should complete a credit application and you should verify their information with a major credit agency. If your customers are other businesses, you should request, and contact, references from several other businesses they’ve done business with. Find out whether the company has any history of late payments or other problems.
2. Contract: It’s easy to get so excited about a new customer that you proceed without having a firm contract in place. That’s a big mistake, because without a contract you severely limit your chances of ever getting repaid if the company does declare bankruptcy. For added protection, put a clause in your contract that specifies what will happen if the customer declares bankruptcy or is unable to pay.

Once you are satisfied that the customer meets your credit standards and you have a contract in place, your work isn’t done. Keep abreast of your company’s financial data and accounts receivable so you notice when customers suddenly start to pay more slowly. If you use accounting software such as QuickBooks, it’s easy to track payment histories and see patterns.

If you notice a customer suddenly paying later and later, get on top of the situation. You may need to instigate a discussion to see what the problem is. Perhaps it’s something as simple as a new office manager or accountant who is getting up to speed on the company’s systems, but you need to find out.

If a customer stops paying entirely or if a check bounces, act quickly. Contact the customer and find out what’s going on. If there is a problem with the customer’s finances, it’s important that you not fill any further orders or provide services until they get current on their missed payments. You will also want to put future products or services on a payment-upfront basis. What you want to avoid is a situation where you keep delivering for a customer who can’t pay, thus running up a bigger and bigger unpaid bill.

If worse comes to worst and your customer declares bankruptcy, you’ll receive a notice in the mail. The first step, again, is contacting the customer personally. You may be able to resolve the matter without getting an attorney involved. If you have shipped product that hasn’t been paid for, see if you can get it returned. The United States Bankruptcy Code gives you 20 days after the business has filed for bankruptcy to do this.

What if you can’t get your money back? Then you will need to enlist an attorney. Good record-keeping will help in your cause. Gather all the documents you can about your relationship with the customer, including how much money they owe you, contracts with the company, invoices and any other records that prove what the company owes you.

If you use the preceding steps, however, hopefully it won’t come to that. When it comes to protecting your business from the fallout from customer bankruptcy, an ounce of prevention is worth a pound of cure.

Image by Flickr user steakpinball (Creative Commons)