Protecting your business from bankrupt customers and suppliers

Being a small business it is likely that you are dependent on a relatively small number of customers and suppliers. As a consequence, if one of these key contacts goes belly up, the impact on your business will be significant.

D&B research (conducted in September 2009) shows that one in ten Australian firms are at risk of experiencing significant financial stress or failure in the coming year. With that figure in mind, the need to protect your business from potential risk is clear.

Following are a few ideas that your business could implement to protect against the risk of customer and supplier failure:

  1. Appropriate due diligence - a requirement for all customers and suppliers
  2. Ongoing monitoring - be alerted to issues before they get out of hand
  3. Spread your risk - go after more of the right customers

Appropriate due diligence - a requirement for all customers and suppliers

Conducing the appropriate due diligence prior to the extension of credit is an absolute must, and once you have a process in place it should be a relatively simple activity. Smart business operators always conduct a credit check prior to the extension of credit, regardless of who the potential customer is. 

Many firms have fallen into the trap of assuming that big organisations are stable operations that don't need to be credit checked - this is not the case. Size should not be assumed to correlate with timely payment behaviours. In fact, D&B's trade payments analysis - which analyses the time Australian firms take to pay each other - reveals that big businesses are slower to pay than their SME counterparts and have been for a number of years. Therefore, you need to determine whether your business can afford to take on customers with a history of poor payment performance and, if the answer is no, you need to be prepared to turn these customers away. 

A credit check will allow you to determine whether a potential customer or supplier is financially sound by examining key indicators such as:

  • What is the standard payment term for this company - 30 / 60 / 90 days or more?
  • Are there customer lawsuits outstanding or has this vendor ever been sued for late or non-delivery?
  • This company appears solid but is it related to another that may not be creditworthy?
  • Who manages the company, have they been on the board of a failed company?

The more credit you plan to extend the more extensive your due diligence process should be.  It may be worth setting appropriate parameters as to what aspects of a business need to be investigated based on the dollar value of the potential relationship. This will help to ensure that your entire team is clear about what needs to be done in a given situation.

Ongoing monitoring - be alerted to issues before they get out of hand

The business landscape is constantly changing and chances are the financial health of your customers and suppliers is also changing. Consequently, conducting a credit check at the outset of a relationship simply isn't enough to ensure that your customers and suppliers will remain a viable and prompt paying business throughout their life. In fact, D&B's experience shows that around 80% of bad debt comes from companies that you have been working with for more than a year.

The best way to prevent a nasty surprise such as a bankruptcy of a key customer is to monitor the ongoing heath of your customer | supplier base. This activity can save you a significant amount of heartache by providing an early warning that trouble could be on the horizon and allowing you to address minor issues before they become a significant burden on your business.

Ongoing monitoring doesn't need to be a time consuming process - a program can be established that alerts you to adverse events within your customer | supplier base. These include:

  • an increase in company risk
  • an increase in delinquent payments
  • court actions
  • collection notices.

Having this information will allow you to take appropriate actions to protect your business. This may mean a revision in credit terms or it may mean you chase outstanding debts more quickly. Regardless of the action required, having this information will allow you to prevent the financial detriment that would likely result from not understanding the changing status of your customers.

Spread your risk - go after more of the right customers

Maintaining a diverse customer base is the best way to spread your risk. If you are overly dependent on just a few customers and one goes belly up, the impact on your business could be catastrophic!

So what's the best way to spread your risk? Find out who your best customers are and go after other clients that have a similar profile. By utilising analytical, predictive and profiling tools you will be able to segment your data in a myriad of ways. This includes developing an understanding of the behaviours of their profitable customers - this is the key to finding the right customers to chase. But, the truly sophisticated SMEs don't stop here. Once they have found the customers they want to chase they examine the likelihood they will still be here in 12 months and, whether they have the capacity and propensity to pay on time.

You may not have the tools available to do this yourself so if you need outside help to get this process right, be sure to find a reputable firm to help you.


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