I had a mid-size staffing firm client of mine called me last month with a very good question. His company just had a client who owed about $8,000.00 go out of business before paying. The question to me was, “How do I know if a company is about to go out of business?”
Let me preface my response with a few assumptions. This answer applies primarily to small or mid-sized businesses rather than to large, publicly-traded companies. If they are large companies and have talented CFOs that understand cash flow, they can hide a great number of problems until they finally implode. (Recall World Com and Enron!) These are the exceptions, though. Most companies in trouble send out warning signs long before they close their doors.
Analyze the following 4-stage chronology of a company that goes out of business:
Stage one: Client starts to have cash flow issues and stretch their primary bills out 10 to 14 days past-due. They will pay second and third tier creditors at 30 to 45 days past-due. Staffing firms and recruitment firms are almost always treated as 3rd tier debt.
Your Response:Keep a close eye on the client. Make a few phone calls and get a commitment on a specific date of payment.
Stage two: The debtor is 30 days past-due with main creditors and 60 to 90 days on third tier creditors. You will start to hear rumors and you may start to see a few collections show up on the business credit reports. The debtor may also bounce checks to you and claim the bank made a mistake.
Your Response:If you have a good relationship with the client, ask them to sign a personal guarantee. Have them also sign a promissory note with a firm commitment on when and how you get paid. If the debtor refuses you may want to turn the account over for collections with whomever you use.
Stage three: The debtor is 60 to 90 days past-due with main creditors. They are not returning your calls and will not commit on when you get paid. They also may become abusive if you do talk to them regarding payment.
Your Response:You need to do something…time is running out. Send to collections or send to your attorney.
Stage four: They are not paying anyone. Companies have filed suit against them and everyone has turned them over for collections. The client does not answer the phone live but instead uses voice mail or an answering machine. They never return calls. Their employees are calling you for a job.
Your Response:You really do not have one. If you turn it over for collections they will not pay, as they have lost the ability to pay. If you file suit it would be a waste of time because it takes about a year to work through the legal system and they will not be around by then.
Inevitably, the company dies. The phone is disconnected and they have moved. At this point, they can legally change their name and open up somewhere else and not owe you a dime.It is critical for you to catch it before it gets to stage 3. Typically, a company in stage one or two can improve and pull out of it, while companies in stage four rarely survive.
Consider these sobering statistics: If a company is 30 days past-due, you have a 97% chance of getting paid on your own. If a company is 90 days past-due, you have a 72% chance. If a company is 6 months past-due, the success rate drops significantly, to 37%. If the account is 12 months past-due, your chance is a mere 6%.
Think your slow-paying client may have larger problems? Find out. Send an e-mail to firstname.lastname@example.org to receive a coupon good for one free Business Credit Report.