For suppliers, one of the biggest collection risks is a customer who continues ordering materials while falling further behind on payment. Continued business does not necessarily mean a customer is financially healthy. In some cases, it may mean the customer is relying on new revenue or new credit to pay old debts. Before extending additional credit, suppliers should watch for these five warning signs:
1. The Outstanding Balance Keeps Growing
If a customer continues purchasing while its past-due balance increases, the supplier’s exposure is growing with every shipment of materials. Consider placing the account on credit hold or requiring payment before additional materials are supplied.
A customer who makes occasional partial payments may appear to be addressing the debt while the overall balance continues increasing. Look at whether payments are actually reducing the outstanding balance.
2. Other Creditors Are Pursuing the Customer
Lawsuits, mechanics liens, judgments, bond claims, or other collection activity can indicate that the payment problem extends beyond your company. A supplier should investigate significant creditor activity before increasing its exposure.
3. The Customer Changes Entities or Payment Arrangements
Be cautious when a customer suddenly asks you to invoice a different company, accept payment from a related entity, or transfer an account to a newly formed business. These changes may have legitimate explanations, but the supplier should determine who remains responsible for the existing debt.
4. The Customer’s Projects Are Experiencing Problems
Delayed or abandoned projects, disputes with owners or general contractors, and nonpayment upstream can affect a contractor's ability to pay its suppliers. Suppliers should determine whether project-specific remedies, such as mechanics lien, stop notice, or payment bond rights may be available.
What Should Suppliers Do? When these warning signs appear, suppliers should consider:
- Stopping or limiting additional credit
- Investigating lawsuits, liens, judgments, and related entities
- Reviewing available mechanics lien, bond, or other project-specific remedies
- Evaluating collection action before the balance becomes even larger
The best time to investigate a collection problem is before the customer stops ordering, stops answering the phone, or runs out of assets. A customer who is still doing business may still be experiencing serious financial problems. Suppliers should not confuse continued orders with an ability to pay. If you need help collecting from a customer who has been missing one too many payments, or need advice on enforcing mechanics lien and bond rights, please feel free to reach out.