You hear rumblings that a big customer is getting ready to declare bankruptcy. But you’d still like to have his business and protect yourself. You may be able to do both if you approach the situation carefully.
One way would be for the customer to designate you as a “critical vendor.” To do so, according to bankruptcy lawyers Bruce Nathan and Wanda Borges, the customer would have to:
- obtain the goods or services only from you
- show that your price is lower than competitors’, and
- show that the two of you have a long-term business relationship.
OK, if you can get the customer to slot you into those criteria, there’s another crucial step — avoiding getting burned in case of default. Here’s what Nathan and Borges suggest to accomplish that.
First, realize you can’t change the credit terms that existed before the customer petitioned for bankruptcy. In other words, if the customer was on a 30-day open account, you can’t suddenly switch to COD.
What you can do: Negotiate an “out” in the event of default. For instance, your critical-vendor agreement would have a clause stating that if the debtor defaults, you’ll be able to stop extending credit.
