Red Flags

Do not ignore the signs of financial difficulty that signal collection action must be taken to mitigate potential losses. If you are the first to recognize that a debtor could fail and take action, you are likely to recover all of your money. If you are the last, your overdue balance is going to be treated as a write-off. If an account is timely placed after deducting our fee of approximately 15%, you will recover 85% of what you are owed. In most situations, a creditor’s gross margin markup will be more than 15%, thus by acting swiftly a profit can still be realized albeit smaller as opposed to a total write-off that will affect profits detrimentally dollar for dollar. At the end of the day, your company’s bills are paid; meaning whatever is lost to write-offs has a negative one on one affect upon profits. The most common corporate red flags are:

• Current assets are not substantially greater than current liabilities

• Failure to complete restitution on NSF check within two weeks

• Two successive years of declining net worth

• More than 10% of trade report vendors report “slow pay”

• Lower trade balances current while higher trade balances report “slow pay”

• Closing unprofitable location

• “Other vendors are working with us”

• “Our bank loan is in arrears.”

• Paid report “alert” or downward rating revision.

• Refusal to divulge financial facts (none of your business).

• Unpaid loans to shareholders carried on the books.

• The debtor’s business is less than three years old.

• Sudden change decreasing net worth.

• Cash raising sale in progress.

• 20% or more decline in gross sales compared to prior year.

• Shareholders refusal to subordinate their secured debt

• Refusal to update Balance Sheet, Operating Statement or provide the latest tax return.

• Refusal to immediately honor COD terms on an inadvertent open account shipment.

• Incomplete credit references on the credit application.

• Corporate officer or partner leaving.

• Looking for investors.

• Waiting for insurance proceeds.

• Overdue IRS taxes.

• Overdue State taxes.

• No fax machine.

• Other companies sharing the same offices.

• Shared phone numbers.

• “Moving the business” – new address unknown.

• Request for extended terms.

• No response to leave words.

• In business less than three years.

• Loans to officers.

• Credit references representing only small balance history.

• “Ship to” is a common warehouse shared by other businesses.

• Inventory Levels are too high.

• Reticence to provide current Balance Sheet and Operating Statement.

• Only known address is a PO box.

• Absentee ownership.

• Increase in trade inquiries.

• Employee layoffs.

• Flat sales.

It is vital that these Red Flags of Commercial Credit Problems are noted and quickly acted upon. Your customer may begin to stop paying items deemed as unnecessary expenses. One of those items could be the line of credit granted by you. If you see a pattern forming, take immediate action and make a quick decision if you don’t your customers other vendors will, and you will be last in line to be paid. In this case, the second mouse does not get the cheese.
The longer you wait the less chance RTS will have in recovery.