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No one likes to hear news of a customer unexpectedly going out of business, but it's an occurrence that goes with the territory in credit. The key is to manage the situation properly so it doesn't end up hitting the fan.
Stories about customers going out of business can come from a variety of sources, including returned mail, your sales reps, other vendors, other customers, the debtor's former employees or even the debtor themselves.
But stories are just stories until they are verified. When you hear about an account going out of business, the first thing you need to do is sort out the gossip from the facts.
Once you know what the truth is, you can start dealing with the most important issue: whether or not you will be paid and how to maximize any future payment. That all businesses close their doors sooner or later is simply a fact you must come to accept. What is critical is how they do it, because that affects what you can do to protect your company's assets.
To help you get all the facts straight when a customer does close up shop, we've created a 13-point checklist. There may not be anything lucky about the number of items on this checklist, but we are certain it will help you leave no stone uncovered.
1. Review your credit file.
If you have done a good job collecting information as part of your application approval and existing account credit review processes, your credit files should contain a wealth of customer information. Credit applications, credit reports, collection logs, and correspondence can all provide sources of primary (e.g., owners' home and cell phone numbers) and secondary (e.g., trade and bank references) contact information.
2. Contact the account
Assuming your customer's phone is still in service or you are able to track down the ownership at another number, don't hesitate to try to talk to your customer. When a business is or has closed, there can be a lot of rumors, and the ownership is the best source for getting to the truth.
Once you have them on the line, be prepared to ask a lot of questions such as:
- Where can I reach you in the future?
- What are you going to do about your bill?
- Why are you closing up shop?
- Are you selling any part of the business?
- Do you still have any of our products in inventory?
- Does anybody owe you money?
The more you probe the greater the chance you will come up with something worthwhile, whether it is an asset you can recover or a business opportunity that might reveal itself.
3. Ask sales to visit the account
If you are not able to make contact and cannot easily visit the account yourself, ask your sales rep or sales manager to stop in. A lot can be learned from an onsite visit, even if you have already talked to the owners.
4. Contact the debtor's bank
The normal channel for references at banks are typically tight lipped, so you should try to talk to the debtor's account officer. (That information should be in your credit file.). Account officers, especially if they are holding loans, will be as interested as you to hear any suggestions that their account is going out of business, so if you play it right, this can be a good opportunity to share information.
At a minimum you want to confirm whether or not there are active accounts at the bank, and if there are, get updated average balance information. If the account is active, you also want to ask if they are in good standing. Bankers will usually not tell you if an account is not in good standing, but their lack of endorsement is all you need to know.
5. Talk to other creditors
When a customer goes out of business, chances are you won't be the only creditor going through this drill. It's a good idea to compare notes, and in some circumstances (e.g., if a fraud has been committed or there is cause to initiate an involuntary bankruptcy filing), mutual action can be called for.
If you are part of a credit industry group, your peers can be a tremendous resource. You can locate other creditors by checking back with the customer's credit references (from their application) as well as by contacting vendors who previously contacted you for a reference on the debtor.
6. Call the landlord or leasing agent
Landlords usually know what is going on with their tenants. You should have captured this information on your credit application, but if not, it is fairly easy to find out who the landlord is by a visit to the property or through a public record search.
7. Track down ex-employees
These folks love to tell all, and may even know about open jobs if their employer is a contractor or in a similar type of business. Keep in mind that "going out of business" does not necessarily mean that all business has been concluded. Your sales rep will usually have phone numbers for key employees of the debtor.
8. Ask your credit bureau to investigate the story
While you are conducting your investigation, it is also worthwhile passing the "out of business" story along to your credit reporting agencies. They like to keep their files up-to-date and so will do their own research regarding the debtor's status and report back to you.
9. Check with appropriate government agencies
Even though it sometimes takes a while for government bureaus to update their records, it can prove worthwhile to check with the secretary of state, the agency administering resale certification, or any licensing authority (e.g., contractors' licenses) to see they have recorded any status change.
10. Check for a bankruptcy filing
Sometimes an out-of-business story is prompted by a bankruptcy filing, and you will need to take quick action to preserve your reclamation rights. For that reason you need to see if there has been a filing. All it takes is a quick internet search that can be accomplished at http://pacer.psc.uscourts.gov/index.html or via a service such as http://www.banko.com.
11. Hire a private Investigator
When you are faced with a large outstanding balance, your investigation is coming up empty, and nobody from your company is available to visit the business, you might want to hire a local, licensed P.I., even if only for a few hours of his time. Because private investigators know the local scene, the information they turn up can be well worth the investment.
12. Send a certified demand letter
Assuming mail is being accepted, a certified letter puts the debtor on notice you are not going to just fade away. Also, make sure you note on the front of the envelope under your return address, "Please Forward, Address Correction Requested" in order to take advantage of the resources of the US Postal Service.
13. Forward your claim to a collection agency or attorney
When you have done everything else on this checklist, and you are no longer making progress toward collection, there is still a chance a good agency or collection attorney can uncover something or someone to go after. Make sure you forward all the information you have collected to this point, as it will help them hit the ground running. In addition, even if your collection agent is unable to turn up anything, they will at least provide you with written verification the debtor's business is closed so you can document your bad-debt write-off.
Obviously, all the items on this checklist will not apply to every situation where there is claim that a business is closing up shop. Still, by diligently going through the list and acting on the relevant items, you can be confident of conducting a thorough investigation into the matter and thereby uncovering any opportunities for recovery that may exist.
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