Red Flags

Customer or Debtor? Red Flags and Early Warning Signs that your Customer May be a Debtor

RedFlagsIt’s important to act quickly when accounts show signs of delinquency, or your customer may become a debtor. Acting early allows you to accelerate collection efforts before it is too late.

Being proactive also empowers you to resolve the problem to your satisfaction, or if necessary, terminate the credit relationship.

Taking any of these actions, however, assumes that you recognize the early warning signs. Once a bankruptcy notice arrives or you get a disconnected phone number, it is too late.  Protect yourself by learning the early warning signs.

Red Flags and Early Warning Signs 

1.) Broken Promises: A Sure Sign of Problems

Broken promises are the best indicator that an account is turning troublesome. You have to rely on a customer’s integrity when you accept promises to pay. When a customer breaks a promise, you need to question that customer’s reliability.

If a customer breaks a promise more than three times, then that customer has become a debtor. Rehabilitating a debtor can be difficult, so take remedial action before the customer breaks a third promise.

2.) Unreturned Phone Calls

The existence of voice mail is a frustrating fact of business today. Voice mail offers debtors the opportunity to avoid your calls without having to provide a reason.  When leaving a voice mail message, be sure to give the party a specific deadline for returning your call.

You know you are dealing with a potential problem account if you routinely leave more than one message before getting a return call or if more than two calls are not returned. Here is a hint: Follow up the messages you leave with a fax. This simple action should increase your response rate. Better yet, save time by writing standard fax verbiage and incorporating this step into your “collection package.” Be certain the fax includes a specific deadline for returning your call.

3.) An Increase in Reference Requests

Another common warning sign is receiving reference inquiries from other vendors about your customer. This may indicate that your customer is having problems obtaining credit from its usual vendors and is attempting to establish credit with other sources. If so, your customer may be overextended. Be careful extending additional credit and maintain a close eye on the customer. Also, keep the other vendors’ names and numbers for future reference.

4.) Changes in Payment Patterns

When established payment patterns start to deteriorate, assume that cash flow problems are the cause and investigate. You may need to take steps to ensure no additional credit is extended. By working with you, the customer is showing a desire to honor the obligation. However, the account must still be monitored carefully. If a customer avoids payment, it may be time to escalate collection efforts to protect the receivable.

5.) Changes in Buying Patterns

When a customer’s buying pattern changes, that customer may be seeking credit from other vendors. This is especially true when the customer’s payment patterns have also changed. A company under financial distress will frequently look for credit elsewhere to stay afloat. When a customer’s credit limit with you and other suppliers is at its maximum, the customer is going further in debt by obtaining credit elsewhere.

You may want to order a credit bureau report to help confirm this situation or call your Altus consultant to take advantage of our free “Business Activity Scan.” This tool is different from a credit report in that it does not contain trade references, but  it may shed light on outstanding liens, judgments, UCC filings and/or recent collection activity.

6.) Cash Flow Excuses

Even good customers have occasional cash flow issues. When a customer claims cash flow problems, verify the information and set a deadline for resolution. If a customer fails to meet the deadline, you must recognize it as another broken promise. When a customer is constantly hoisting the cash flow flag, your receivable may be in jeopardy. Contact other vendors to determine if they are experiencing the same payment delays and do not extend additional credit. You should attempt to bring the account current within two or three weeks and sell only on COD terms until you are assured that the customer is back on track.

Knowing the early warning signs of a customer in financial distress gives you the opportunity to take the initiative before it is too late. When warning signs appear, don’t delay, particularly when they begin to multiply. Take immediate steps to protect your receivables by contacting your customers, investigating problems, and determining a plan for resolution.

Remember, customers make promises and keep them. Debtors make promises and break them.