New guide offers insight into why businesses fail, the FDCPA, relevant chapters of the Bankruptcy Code and much more. Available for purchase at store.abi.org.
Here's a brief excerpt:
“An ounce of prevention is worth a pound of cure.”
— Benjamin Franklin
Feb. 4, 1735, edition of Pennsylvania Gazette
There is no worse feeling for a business owner than having a major customer file for bankruptcy and leave behind a large unpaid account receivable. A business owner is left wondering, “What could I have done to prevent this?” The answer: Preplan for potentially distressed vendors and customers who may ultimately have to file for bankruptcy. Pre-bankruptcy planning is a necessary evil in this business-centric, capitalist society within which we operate.
Once you receive a notice that your vendor has filed for bankruptcy, there is not much, if anything, you can do to improve your position vis-à-vis other general unsecured creditors. Sure, you can demand payment in advance (PIA) or cash on delivery (COD) treatment while they are in bankruptcy. You may even be fortunate enough to have your services deemed critical and have a portion of your unsecured debt paid in exchange for continuing on the same (or possibly better) terms as existed prior to bankruptcy. But at the end of the day, once you have a bankruptcy notice — IT IS TOO LATE!
What is the “Ounce of Prevention?” Pre-bankruptcy planning should be a mandatory tool in all business finance plans. From a business perspective, your goal is to generate as much revenue as possible. In furtherance of that goal, the business department may take on risks that the finance department would be wary of. In most instances, the reward (additional revenue) outweighs the risk (potential distressed customer). Unfortunately, that is not always the case. And it only takes one bad experience to change your mind when it comes to collections planning with potentially distressed vendors and customers.
Due diligence — such as credit checks and UCC-1 searches, to name a few — is paramount when screening a new customer. As they say, the devil that you know is better than the devil that you do not. If you complete your due diligence and assess that there is some risk with this customer, but the business relationship justifies that risk, then you went into the relationship with your eyes wide open. You will be more diligent in assuring that the new customer pays within terms and in the means called for by the invoice. This is a much better scenario than continually fulfilling orders only to realize that this relatively new customer is already 120 days late and is a credit risk.
Our goal is to provide some insight into the options available to you to help screen your customers, plan for the worst-case scenario, and, if the situation unfortunately does arrive, efficiently handle that worst-case scenario. In addition, this book provides background and insight into things such as the why business fail, the Fair Debt Collection Practices Act and other statutes that affect your relationship with vendors, the different chapters of the Bankruptcy Code, out-of-court alternatives to bankruptcy that may affect you, and several other concepts that business owners should be aware of when dealing with distressed vendors. Arming yourself with the requisite knowledge in these concepts will give you a leg up on your competition. This ounce of prevention may be your pound of cure.