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Navigating Insolvent Customers: 5 Signs Your Buyer is at High Risk of Insolvency

Bhupendra Washishtha

2 min read

Jul 3

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2023 has been a challenging year for businesses across the US and Canada. According to the U.S. court system, corporate bankruptcies have surged by 30% over the past 12 months. As a credit manager navigating these turbulent times, it’s crucial to keep a keen eye on your customers' financial health to preemptively address potential risks.

Here are five key signs that indicate a buyer might be on the brink of insolvency. Identifying these early can help you mitigate risk and ensure timely collections.

  • Sudden Changes in Payment Habits: One of the first red flags of financial distress is a sudden shift in payment behavior. If a customer who previously paid on time starts missing deadlines, making late payments, or switching to irregular or partial payments, it’s time to dig deeper. These changes often signal underlying financial troubles. By closely monitoring these shifts, you can gain valuable insights into your customer's financial stability and take proactive steps to manage the risk.

  • Large and Dramatic Increase in Purchases: While an increase in purchasing activity might seem positive, a sudden and dramatic spike can be a warning sign. This behavior might indicate that the customer is attempting to stockpile goods before a financial collapse, reflecting a desperate bid to maintain operations. Keeping an eye on unexpected purchase spikes can help you assess the customer’s financial health and decide on necessary measures to protect your business.

  • High Level of Management Turnover: Frequent turnover among top executives is often a symptom of internal turmoil. When key leaders leave or are let go, it might be due to financial mismanagement or strategic challenges that could lead to insolvency. Tracking these changes provides critical context for evaluating your customer's overall health and adjusting your credit and collection strategies accordingly.

  • Bad Checks and Higher NSFs: An increase in dishonored checks and Non-Sufficient Funds (NSF) occurrences are clear indicators of financial instability. If you notice a rise in bounced checks or unfulfilled payments, it suggests liquidity issues and potential insolvency. Monitoring payment instruments and responding proactively to such incidents can safeguard your receivables and mitigate risks from financially distressed buyers.

  • Abrupt Change in Business Name: A sudden and unexplained change in a customer’s business name can be a tactic to evade financial obligations or legal issues. This might indicate an attempt to start afresh or hide from creditors. Staying alert to such changes and conducting thorough due diligence can help you anticipate potential insolvency risks and implement measures to secure your interests.

In these uncertain economic times, staying attuned to the financial health of your customers is crucial. By recognizing and acting on these five signs of potential insolvency, credit managers can proactively safeguard their business interests, implement effective risk management strategies, and maintain a resilient approach to credit operations. By understanding these warning signs and taking preemptive action, you can navigate the complexities of today’s financial landscape with confidence, ensuring that your credit team is well-prepared to handle potential risks. Ready to see how NetNow can help your business with credit management? Call us 1-833-663-8669 or Book a Demo here!

Bhupendra Washishtha

2 min read

Jul 3

0

0

0

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