What To Do If Your Customer Or Vendor Is In Financial Distress

The pandemic has had far-reaching effects, and those effects will continue to be felt in the coming months as more and more consumers and business struggle to survive in the changing economic circumstances. Some economists forecast that there will be a wave of bankruptcies as individuals and companies exhaust their savings and cash reserves and are left with no alternative.

Given this, what should you do to protect your business from bankruptcy filings by your customers and vendors? There are a few things you can do to make sure that you are well-positioned if a bankruptcy does get filed.

1. Closely monitor your receivables: This one is obvious, but it can be a red flag if a customer starts paying slower than normal or running up larger than average balances. It is important to stay on top of your receivables and prevent your customers from getting behind. Once your customer files bankruptcy, you will likely be left with an unsecured claim that is unlikely to get paid.

2. Require payment in advance or upon delivery: If you get paid upon delivery, the transaction is considered a simultaneous exchange for value, and it is unlikely that the payment could be reversed in bankruptcy. However, if you allow a customer to purchase on credit, and the customer carries a balance and makes payments, it is possible that payments made on that balance could have to be returned if the customer files bankruptcy. This is called a preference payment. I will address preference payments and how to avoid them in a future blog post.

3. Be careful when prepaying for materials and supplies: You can also run into difficulties if a supplier or vendor files bankruptcy. For example, if you prepaid for a shipment of raw materials, and the vendor files bankruptcy before the shipment is delivered, you may be unable to get your cash back or your goods delivered. The delay could put your business in a bad spot.

If you suspect that one of your customers or vendors is in financial difficulty, it is a good idea to consult with legal counsel to be ready in the event they file bankruptcy. We at Revolution Law Group are happy to help you.

The information included here is for informational purposes only, is not exhaustive of all considerations when creating documents, is not intended to be legal advice, and should not be relied upon for that purpose. We strongly recommend you consult with an attorney and do not attempt to create your own documents