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The Advantages and Disadvantages of Selling to a Publicly Traded Company
Michael C. Dennis, MBA, CBF

Business Credit Concepts
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There are a number of advantages to selling to a publicly traded company in the U.S., including these:

  • Financial visibility based on the quarterly reporting requirements mandated by the SEC

  • Audit requirements [also from the SEC]

  • The fact that public traded companies take substantially higher risks if they present fraudulent financial statements... which is a crime under the U.S. Securities and Exchange Act]

  • The fact that a publicly traded company must disclose material events of interest to investors and creditors soon after they occur [using SEC form 8K] rather than waiting for the end of the quarter to announce the change or problem.

  • The fact that some publicly traded companies are able to raise cash by selling corporate bonds [in effect, corporate IOUs]

  • The fact that public companies can also raise cash by selling more stock.

  • Access to detailed footnotes as well as narrative commentaries about the company's past financial performance, and its future prospects

  • Financial statement analysis on many publicly traded companies can be obtained on line at no cost - saving trade creditors time and money.

  • Stock and financial analysts often publish their expert opinions about public companies for the benefit of anyone who wants to know more about the companies

  • A public company's stock price is a barometer of the company's financial health as well as its future prospects. Specifically, a significant or precipitous drop in the value of a company's stock might indicate credit problems for the company in the short term.

  • Creditors have access to readily available news and press reports

  • Rating agencies [in particular bond rating services] provide ratings on public companies that trade creditors can use as an early warning system for potential financial problems.

  • It is possible to track the status of scheduled debt payments.

  • Insider trading may be used as a harbinger of problems or successes to come

  • There is more information about the company's competition, and more data about industry trends and possibly about industry norms.

The disadvantages of selling to a publicly traded company cam include each of the following:

  • Trade creditors can become overconfident and complacent because they are selling to a publicly traded company... possibly even a household name.

  • Audited financial statements could still be inaccurate, or even fraudulent

  • Press releases made by the company could be misleading

  • It is not uncommon for a large public company to flex its muscles and try to strong-arm trade creditors into making concessions the creditor would not make to a smaller or less important customer.

  • It is possible that off balance sheet financing may be hidden from trade creditors and others.

  • It is possible that stock analyst may be hyping the stock.

  • There is an assumption among trade creditors that public companies do not fail or file for bankruptcy protection. That assumption is incorrect.

  • Some public companies have complex debt structures --- hiding debts in affiliates, subsidiaries, holding companies and shells. Trade creditors may not have the time, or the expertise to understand the complexities of such a company's financial reports and as a consequence may be accepting more credit risk than the creditor was aware of.

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