How to Mitigate Risk When a Customer Files for Bankruptcy

Protect Your Small Business From a Customer’s Bankruptcy

Sure you have to wait for your client’s bankruptcy to take its course, but there are two things you can do in the interim.

1. Consult with your CPA.

Consider taking a tax deduction for the bad debt. If you manage to receive some money owed to you after the bankruptcy case is settled you can claim it as income at that time. Consult your accountant for details.

2. Assess your opportunities.

If your client files for Chapter 11 or 13 and asks to continue a working relationship, it may be to your advantage. Of course your immediate reaction is to quickly say “No way!” But understand that Chapter 11 and 13 require debtors to stay current on all accounts moving forward. This means you can add a fee to recover what was lost, stricter payment time frames, and maybe exclusivity, as others may not take a risk. Keep in mind, the best way to reduce or eliminate risks is to get paid up front.

How to Minimize Future Risk

Now that you are familiar with the types of bankruptcy, payment pecking order, and what you can do to protect your business as the bankruptcy takes its course, it is important to prepare for the future.

Start with an assessment of your small business to prevent this problem from happening again – at least what you can control.

1. Screen new clients carefully.

Create a process on how to screen new clients by knowing their payment history. There are many tools and resources you can use online that are free or for a small fee.

2. Improve AR aging management.

Improve your accounts receivable aging management procedures. They may be “current” but these accounts still require all of your attention. Current receivables can quickly turn into problems if you don’t pay attention.

3. Be professional with collections.

Be persistent and tough but professional with your collections. You can also consider resources available to you such as factoring your receivables where the risk of non-payment is transferred to the factoring company. In this case, you can get paid quickly without the responsibility of collecting and risk of non-payments.

No small business is immune to the unexpected, especially dealing with a customer who has recently filed for bankruptcy, but you can certainly minimize your risks as you work towards a successful year.

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This post is written by Ramir Rodriguez is a Business Development Officer with Treasure Valley Factors. He has helped businesses understand how factoring can help them get paid on completed work and grow their business. For more information on factoring please visit the blog Factoring Helps. Don’t forget also to connect with Ramir on Twitter and LinkedIn and “Like” Treasure Valley Factors on Facebook.