Aside from the obvious signs of a bill coming due and no payment being made, there are many ways to tell if a customer is in trouble or represents a serious credit risk.
Slow pay rate
The clearest sign of treacherous waters ahead is also the simplest: taking too long to pay bills. It could be for any number of reasons, but in the end, when a customer’s credit rating suffers, so do its partners.
Being inattentive to pay patterns could result in a customer going under and taking others with it. Less dire, though still problematic, is a failing customer’s losses hindering others’ ability to stabilize and generate new business.
Fluctuating orders
It may seem obvious, but any customer that can’t pay for what it has already purchased is less likely to purchase anything else. If the reverse is true, then there’s real trouble ahead.
Ordinarily, if a customer begins to falter and is unable to pay its accounts, there’s usually a slow but steady decrease in orders reflecting its inability to finance future purchases. When fewer shipments are going out, less revenue is coming in and so begins a downward spiral.
If, on the other hand, the struggling customers continues to place orders in an attempt to shore up its own accounts receivable, with making payments to its suppliers, then it is knowingly creating risk and could take trading partners down with it.
Poor communication
No one likes to admit when a business is going through a difficult period, but silence may be more telling than words. If a customer doesn’t check in as often as in the past, or if communications are evasive or curt, it may be an avoidance to discuss difficulties, financial or otherwise.
When the lack of communication extends to the sale of product or services, both parties and their trading partners will begin to feel the pinch and is a sure sign something is wrong.
Broken promises
Many business relationships, especially in the early stages, are built on trust—and a lack of trust can be fatal to those same relationships.
Giving trusted clients the benefit of the doubt when it comes to pay can yield dividends in the long run, if the business is just running into temporary issues. But repeated pledges to pay that are broken or renegotiated, along with scant communication, are a sure sign it’s time to reconsider the risk factors.
This is an excerpt from a Credit and Finance feature in the November/December issue of Produce Blueprints Magazine. Click here to read the full feature.
