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Detecting Distressed Businesses

Know the warning signs and when to take action
Credit&Finance

Detective Work
Michele Pancotto, credit and col-lections manager at Clipper Controlled Logistics in Chicago, admits she was once blindsided by a customer’s financial troubles. The two companies had been doing business together for a long time, and while the produce company was occasionally slow with payments, it always promised to pay. Then there were union issues and Pancotto’s firm took a financial hit, getting only a portion of what was owed.

Although some of the customer’s staff told Pancotto and others they were leaving, which should have been a clue, no one recognized the problem soon enough. To avoid such situations in the future, Pancotto now reads Blue Book’s weekly Credit Sheet reports to monitor changes at the companies she does business with. She watches for rating changes and expired or revoked PACA licenses, and when a business owner retires or if there’s a large turnover in personnel, that also raises a red flag.

“When I see ‘claims filed’ in the report, those companies go on my watch list,” shares Pancotto. “I know this may either be a product issue or a payment issue—the report doesn’t give those details, but I know if Blue Book had to get involved, the parties in question had an issue that couldn’t be settled without bringing in a third party.”

A single resolved claim usually isn’t a problem, but multiple claims with the same company signal the likelihood of financial trouble, she says. Another good bet is paying attention to the industry itself, such as a natural disaster or weather phenomenon that could have a major impact on supply or delivery. Knowing which factors could be influencing a customer’s situation puts creditors in a better position to predict or mitigate financial problems.

Burton also had a customer that didn’t exhibit much in the way of warnings before going out of business. “We’d been doing business with these people for a long time when they had a judgment against them for a substantial sum,” he explains. “The judgment wasn’t made public, so the troubles caught me off guard. The company stopped paying between 14 and 21 days, which is how long most quality payers take. I started calling them and got the runaround.”

So Burton took advantage of a relationship he had forged with the Western Growers Association, asking about the company in question. There had been three other inquiries about the same company and whether it was paying its bills. Eventually, the company did go out of business.

Embracing High-Tech Tools
Technology has changed the way creditors can handle accounts receivable and monitor customer accounts. In the past, phone calls were the norm; now most businesses communicate via email. While email is fast and provides a written record of every communication, Burton notes that it does take away from the personal touch of talking over the phone, which used to help build relationships and friendships.

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