A bad debt is a term used to describe an accounts receivable balance
that has become totally or partially 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 so-called
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 try to reduce your dollar exposure and your
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
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.
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