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Fort Worth, Texas
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Giving Credit After Bankruptcy
Your phone rings. A company wants to place an order and set up an account with you. You do some digging and learn that the firm has a Chapter 11 filing in its past. Your first reaction is refusal. A business with a history of bankruptcy cannot be a good credit risk. Right?
HOLD THE PHONE It's possible that a company with such a history can become a viable account, according to Tom Bernasconi, president, Huntington Banks of Michigan (Troy, Michigan), provided you get the answers to these key questions:
- "What led to the company's bankruptcy filing?" A company that has gone through bankruptcy may still be a good risk. "Sometimes knowing the whole story behind the filing will change your initial response," says Bernasconi.
- "Why was the Chapter 11 filed? Was it due to management's incompetence? If so, have changes been made?"
- "Does the cause for the bankruptcy still exist? Is there a chance it will be repeated?"
"The answers to these questions will provide insight into the company's stability," says Bernasconi. "If, for example, the company is under the same management and uses the same methods of operation, you can be pretty sure the same mistakes will be made. On the other hand, if it has brought in new people and initiated new systems-- and has the ledger sheets to show a turnaround is taking place--the company could become a good account."
Keep in mind that another common reason for filing under Chapter 11 is overexpansion. Usually once the reorganization has taken place, bankruptcy is no longer a risk factor. Companies that have downsized successfully or emerged profitably from restructuring could become profitable customers for you.
The next step: establishing credit. Bernasconi says, "In this situation, I'm sure the company would want to take a look at the prospective customer's financial statement and, by using RMA studies, see how it compares with the statements of other companies in the industry. In particular, check to see if the debt-to-worth and current ratios are comparable."
YOUR MOVE Before extending credit to a post-Chapter 11 company, ask for the same information you would when dealing with setting up a brand-new account--and then go a little further. For example:
- Do a thorough check of the management. If you're dealing with a small company, say, with one or two owners, check their personal finances. Bernasconi says, "If individuals will be guaranteeing the repayment of the debt, I would want to take a look at their bank statements and see what their personal credit looks like."
- Ask to see the balance sheet, income statements, and contracts.
- Check on performance history, and ask about projects, collateral, and the company's ability to meet current operating expenses.
- Inquire as to how the applicant plans to meet these expenses, as well as its prior obligations, in particular those incurred as a result of bankruptcy.
Bernasconi comments: "A credit manager should ask to look at pretty much the same material a bank would look at when a company applies for a loan. I would want to know all about them. This shouldn't prove a problem. Any good credit manager can read a balance sheet and income statement and know how to evaluate them."
Credit Today's Bankruptcy Resources Portal
An unparalleled resource center on bankruptcy issues for trade credit managers - everything you'll need to know to face that unfortunate occurrence.
Credit Today's Bankruptcy Resources Portal
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The Payoff: When dealing with a company with a bankruptcy history, the tendency is to demand cash on delivery. This limits the prospect's ability to buy from you and limits the size of your income. By careful evaluation of a company's history, its present setup, and financial condition, the conclusion to extend credit can be logical and delivery on a 30-day or 60-day account can become a reality. If an applicant's record is good and its current situation seems healthy, you could have a solid, profitable, new account.
Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today in 2006. This article originally appeared prior to 2000.
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Outlook 2012
This month's survey explores...
- What the top problems are facing credit execs currently, and
- What the top improvement initiatives are.
Click here to participate!
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February 2012
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