Reducing Losses

A bad debt is a term used to describe an accounts receivable balance that has become uncollectable. Since most credit managers have no choice but to release orders to accounts they have classified as marginal credit risks, bad debt losses are inevitable. In some cases, a bankruptcy by one large company can cause cascade bankruptcies among its suppliers. If you suspect that one of your customers is in financial trouble, don't panic. Start thinking about ways to minimize or mitigate the loss.

Here are several ways to reduce credit risk:

• Offer the customer you are concerned about a significant discount in return for immediate payment [but recognize that if the customer files bankruptcy within 90 days the payment you received might be considered a preferential transfer and you may have to return it],
• Require cash on delivery on future sales to that customer,
• Regularly attend credit group meetings to stay current on events involving that customer,
• Request a security interest from the customers [and if you are fortunate enough to get the customer to agree, take the time and spend the money necessary to perfect your security interest]

Two final thoughts:  First, in general creditor companies tend to react too slowly to indications that a customer is in financial trouble. Often, subordinates are reluctant to share their concerns with their managers - in part out of concern that the credit manager will "shoot the messenger." The solution is to react quickly and appropriately when problems surface involving one of your customers.  The second observation is that creditors must maintain a certain amount of professional skepticism whether they are speaking with a customer, a salesperson, a competitor, a banker, or other supplier. Why?  Because you can never be certain that you understand why they are sharing certain information with you.

© 2009 by Michael C. Dennis.  All Rights Reserved.  Michael is the author of "Credit and Collection Handbook."