Signs That a Customer May Be in Financial Distress

Some signs of financial distress are easy to see, and hard to miss. But sometimes, the signs of customer financial distress are subtler.  If you know what to look for, you will be able to better manage the risk of serious delinquency or payment default. 

There are a number of events that should trigger action on the part of the creditor --- to evaluate the risk of continuing to extend credit to an existing customer. These events include…

·       A bounced check

·       A decrease in current assets

·       A deterioration in the customer's cash position

·       A disproportionate increase in current debt relative to current assets

·       A high debt to equity ratio

·       A layoff at the debtor company

·       A loss of market share at the debtor company

·       A low quick ratio

·       A net loss being reported

·       A sharp increase in the dollar amount of accounts receivable at the debtor company

·       A sharp rise in accounts payable

·       A slowdown in inventory turnover

·       A slowdown in the debtor’s receivables collection period 

·       An increase in long-term debt

·       Broken payment commitments

·       Falling profits

·       Higher inventory levels

·       Loss of key personnel

·       Lower gross margins

·       Lower returns on sales

·       Lower sales revenue

·       Negative equity

·       Negative working capital

·       One or more creditors placing the debtor for collection

·       One or more creditors placing the debtor on credit hold

·       One or more creditors suing for payment

·       Significant changes in the balance sheet structure

This is not intended to be comprehensive list of events that may trigger a re-evaluation of an assigned credit limit. Instead, these are examples of events that should cause the credit department to pay more attention to the risk of doing business on open account terms with a specific customer.