Protect Your Business Against a Customer Bankruptcy
It may happen more often in a bad economy, but even in good times it's likely some of your customers or even key vendors will file for bankruptcy. While you can't prevent customers or vendors from going bankrupt, you do need to be concerned about it. What would happen to your business if your main supplier were to go "belly up"?
Here are four steps you can take to help protect your business from others' failures:
1. Do a thorough credit check. Before you take on new clients or B-to-B customers, make sure they complete a credit application. Verify their information with one of the major credit agencies. You can get a business credit report from Dun & Bradstreet and even sign up there to monitor a customer or vendor's credit. (Disclosure: AllBusiness is a D&B company.) Also check their references with other businesses they've dealt with -- ask for at least three other references. If the company is just starting out, you should check the owner or owners' personal credit references, as well.
2. Sign a contract. Never do business without a contract in place that is signed by both parties. Having a contract gives you a far better chance of receiving your money in bankruptcy court. Include a clause about what happens if the party is unable to pay or declares bankruptcy. The more explicit you are on this point, the more power you will have on your side if you do end up in court.
Even if the business is slow to pay (without officially declaring bankruptcy), stating clear terms upfront may help you receive any interest due.
3. Stay on top of late payments. Keeping up-to-date with your accounts receivable helps you track payment trends. Accounting software like QuickBooks can help you easily track outstanding invoices to see which customers are behind on payments.
If a customer's payments are getting later and later, you need to take action. Talk to them honestly to see what's causing the slow or late payments. If invoices are going unpaid, put the customer on notice that you will not ship products or provide services until payments are received. You may not get paid this way, but at least you will avoid running up more unpaid receivables.
More from AllBusiness.com:
- Find an Attorney and Drive Up Your Credit Score
- When Filing for Small Business Bankruptcy Makes Sense
- How to Get a Personal Loan After Filing Bankruptcy
- Is There Such a Thing as Bankruptcy Insurance?
- 6 Tools to Help Entrepreneurs Build Better Credit to Access Financing
4. Deal with bounced checks. If a customer's check bounces, call them immediately. Maybe there was a mistake at the bank. It might be worth the effort to take the check to the bank that issued it, and see if sufficient funds are available to cover the check. If they're not, charge the client to cover any fees you may incur.
Also check with your state attorney general's office to see what the proper procedures are for recovering your money. You may need to send a certified letter to the customer or vendor.
What if a customer actually declares bankruptcy? If you've already sent the goods to your customer, first contact them directly to see if there's any chance the matter can be settled without getting lawyers involved. You can also ask to have the goods sent back to you. Under the United States Bankruptcy Code, you have 45 days from the date of delivery to do this, and 20 days after the business has filed for bankruptcy.
If you cannot settle the payments without legal help, then you need to respond to the bankruptcy notice with a reclaim demand document, stating the amount of money you are owed. Documenting your business relationship with invoices, contracts, and other records will help prove your claim.
RELATED: 4 Types of Business Bankruptcy
