Thursday, August 13, 2009

Swim Before You Sink

The downturn in the economy has created "economic collateral damage." Small and medium-sized businesses have been forced into bankruptcy due to the credit problems of their customers, even though their businesses were solid.

Insolvencies in Canada rose 20% from January 2008 to January 2009. As such, many companies are currently at risk.

Experts state that even the best run businesses, with exemplary credit practices, cannot ignore what is happening around them. This is the time for companies to stop being "Mr. Nice Guy" and tighten credit policies with customers.

A common problem is that many business owners have signed personal guarantees to their banks in order to receive company loans. As they begin experiencing problems, they order large amounts of unpaid inventory and leave it for the bank to sell in lieu of repaying loans. The supplier is often the big loser.

Business owners should consider tightening the credit lines with their customers. Don't get caught with over-extended credit to a customer, even those that have been loyal for years. Circumstances may change that long standing relationship.

Credit checks should be conducted periodically. It may be wise to start using written contracts, rather than the informal handshakes of days gone by. If necessary, one should get indemnities or personal guarantees from customers. Essentially, a small pr medium-sized business wants to avoid being an unsecured creditor, should the customer close its doors. "Be prepared" is the credo of modern business credit practices.

One should also diversify, both in suppliers and customers. Being dependent on one primary supplier or customer can be extremely risky. Try to keep one step ahead of the game and put your own business interests first. Keeping one eye open at all times can prevent disaster.

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