Some business failures and credit defaults are impossible to predict. You can do everything right in your credit department and still end up with accounts that are sent off to collections.
While those outcomes are inevitable, you can work toward reducing their frequency by watching for some common warning signs of trouble. If you see any of the following credit warning signs present with either current or potential credit accounts, proceed with caution.
#1 – Credit Report Concerns
This one is an obvious when it comes to credit warning signs, but we need to touch on it quickly because it’s the core of your credit decision process. When you order a credit report on a potential customer, don’t overlook the red flags that may pop up. Sure signs of trouble are accounts that are in collections and a large number of credit inquiries within a short time. A business that can’t pay its existing accounts may be scrambling to get more credit from others, which is not a safe bet. FMCA offers simplified credit reports that can give you summary information to make quick and smart decisions.
#2 – High Turnover
Employee turnover is rarely a sign of stability in a business. This is particularly true in the accounting department. Is the point of contact for accounts payable constantly changing with one of your customers? When that happens, you might want to take a closer look at what’s going on.
The problem with accounting turnover is that it often points to an unstable financial situation. The accounting department takes the brunt of the stress when a business has a hard time paying its bills, and employees will often leave as a result. There are only so many collections calls an accounts payable manager is willing to field before he or she will start looking for another place to work. This is one of the most telltale credit warning signs out there.
#3 – Negative Reviews Online
We all know how online reviews work. In many cases, you can safely ignore one or two bad reviews as nothing more than a disgruntled customer – or those negative reviews may simply be fake.
With that said, there are cases where negative reviews are a sure sign of bigger problems. If one of your accounts starts to fall behind on payments, or if you are on the fence about extending credit to a new account, look around on the web for reviews. Are customers consistently having problems getting furniture? If so, financial troubles may be lurking just below the surface. Credit warning sign, yes indeed.
This was the case with Loves Furniture, a chain operating in Michigan, Ohio, and Pennsylvania. A wave of negative reviews came in as the company struggled to keep up financially and could not fill orders as expected. Eventually, the business filed Chapter 11. A credit department that was monitoring online reviews may have been able to see this trouble coming and cut off further credit before the damage got worse.
#4 – Going Silent
Another warning sign to be aware of in the credit department—silence. Those working in a credit department get used to the back-and-forth communications they have with various accounts. Some accounting departments always pick up the phone on the first ring, while others tend to call back the next day.
When the pattern with a particular client changes, that could be a credit warning sign that the business is stressed. If calls that used to be returned are now being ignored, it’s likely that the business doesn’t have the money to pay its bill. Don’t ignore this change in the status quo – continue to pursue contact and try other forms of communication like sending a letter through the mail, email, etc. Make sure to nip this credit warning sign in the bud.
#5 – An Outdated Model
Bankruptcy risk is not limited to smaller regional businesses like Loves Furniture. JCPenney, one of the most recognized names in American retail, filed for bankruptcy in 2020. While it was a popular brand for more than a century, JCPenney was doomed in recent years by dramatic changes in customer behavior. Carrying huge amounts of inventory in large stores created massive overhead that led to billions in debt.
JCPenney is an extreme example, as it was one of the largest retailers in the country for decades. However, the lesson here is to look closely at the business models used by your customers to spot credit warning signs. Are they operating in large, expensive commercial spaces that could lead to burdensome debts? Keeping up with the times is essential in every industry, and furniture retailing is no different.
As a credit manager, it’s important to stay on top of the latest trends and technologies in the industry. To connect with other home furnishings professionals and enjoy a host of related benefits, consider joining Furniture Manufacturers Credit Association today. Feel free to contact us today to learn more!
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