It’s an unfortunate reality that more small businesses fail than make it past their first five years. Even larger companies are not immune to bankruptcy. In fact, the number of businesses filing for bankruptcy protection has steadily grown over the last several years.
This means that if you run a B2B company that has other businesses as clients, it is essential to have a plan to protect your company from any fallout associated with a client going out of business.
The following are some tips to help you achieve this:
- Never depend on a single source: If you find your company relies too heavily on a single client as a stream of income, consider making efforts to add more clients that could help shoulder the load in the event the large client goes out of business. In a perfect world, you would have at least several large clients, with plenty of smaller clients to serve as safeguards.
- Ask for upfront payment: The best way to avoid taking a big hit if a client goes bankrupt is to ask for payment up front, before you complete the work. This is especially important if your business does not have a significant amount of operational cash flow.
- Keep thorough documentation: Document everything about your client, including orders placed, communications and deliveries, in case you ever need to appear in bankruptcy court and appeal for payment. Consider how much work you are willing to put into securing this money if it comes down to litigation.
- Negotiate if your client is going through financial troubles: If your client goes bankrupt, there’s a strong chance its debt to you will be discharged. This means you should begin negotiating with your client as soon as possible and before a petition for bankruptcy is filed. You might ask for a smaller portion of the payment now and be willing to extend or even forgive the rest of the debt. It may be a better option than receiving nothing at all.
- Ramp up your marketing: This is especially important if you have a large client going out of business. You’ll need to replace their revenue, and so you should focus your efforts on finding one or more new clients to replace what the now-defunct account was providing to you.
- Communicate: Keep in communication with your client consistently so you have a rapport and are better able to work out an agreement during times of financial pressure.
- Be proactive: When a client is going through financial hardship and faces bankruptcy, its leadership is probably not thinking about every single debt owed to various entities. You will need to be your own advocate in this situation to make sure you are not left in an unstable financial situation.
For more tips and guidance on how to safeguard your business against a client going bankrupt, consult a dedicated corporate planning attorney in the U.S. Virgin Islands.
J Nash Davis is an associate in the Real Estate and Financial Services and the Corporate, Tax & Estate Planning Practice Groups of BoltNagi PC, a full service business law firm on St. Thomas, U.S. Virgin Islands.