It seems like every day we hear another story of a company shutting its doors as a result of the economic downturn we are experiencing. Especially hard hit are retail businesses and businesses that serve the retail and construction segments of our economy.
Traditionally, retailers and wholesale distributors have relied on October, November and December to make their year. Some in the industry refer to it as “OND” for the first letters of each critical month. Many don’t get to a break even point until sales revenues increase during those months. This year seems pretty crucial for a number of retailers and those companies that provide goods and services to the industry.
There are a number of big companies on the “watch list” for either closing their doors or filing for bankruptcy protection. Among them are
What should a small business that sells product or service to these companies do to protect themselves? There are a number of things that every business owner should consider in this tough economic cycle, but these few tips may make the difference for your business.
Review your expected sales over then next year. If you have any single customer that represents more than 10 tp 20 percent of your expected sales for the year, look at the condition of their company very carefully. If they are public you can obtain substantial information about them that should let you know how well they are weathering the storm. If you are concerned about the financial strength of a particular customer you have several choices:
1. You can either change the terms of sale to require more money up front or upon delivery of goods and service.
2. You can put them on credit hold/COD if they get behind on their A/P to you until they catch up.
3. You can use a non-recourse factor to buy the receivables from you to transfer the risk from you to the factor.
4. You can buy credit insurance for one or all of your customers. Credit insurance provides a good level of protection against insolvency of your customer’s business. Here is a good article discussing credit insurance.
5. Try to diversify as quickly as you can to spread your collection risk out among new and other customers.
6. Stay on top of your A/R collections on a daily basis. Keep them as clean as you can. If one of your customers does become insolvent and can’t pay you, at least the amount of loss your company will suffer will be less.
7. Regarding # 3 and # 4 above. If you either try to insure a customer using credit insurance and / or try to get a non-recourse factor to buy some or all of your receivables, understand that it is a really bad sign when either a factor or insurance company won’t buy invoices from or insure a particular company. These companies are the absolute best at predicting losses and if they are too nervous about a particular debtor, you should be too.
If your company is in the position where any of this article has struck a cord of concern with you, please contact me directly. I will be happy to further explain my tips and provide a better understanding of how critical these issues are right now.
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EXTRA: If you have questions for Sam regarding business financing, the credit market, and similar issues, please send an e-mail. Your questions will be recorded and Sam will answer the best ones in his Ask the Expert podcast show.