Naval formations are interesting things. Each vessel, be it a destroyer, battleship, cruiser, aircraft carrier, or submarine plays a role in keeping the other protected. Aircraft carriers, despite being among the most valuable for their larger role, are often the least defensively sound. Battleships, vital to the above-sea battle, are vulnerable to undersea attacks. Everything has a role—and if one part of the formation falls, it’s a lot easier for an encounter to end in disaster.

Staying Afloat As Your Surroundings Sink

The same goes for the supply chain. If one part falls, the other portions suffer. You are the aircraft carrier—vital to the large scale operation. Your suppliers and customers, however, also are critical to the fleet, and if something—a recession, tax change, or pandemic, for instance—strikes a successful blow, the entire fleet could falter.

Sadly, for many organizations, 2020 was a torpedo. Suppliers faced challenges securing goods. Customer bankruptcies and insolvencies popped up all around you. Everything was disrupted, and things began to fall.

Though many considered this a prime opportunity to step up and lead, the sheer amount of uncertainty is still unpalatable for many—and 2021 could put even more pressure on your company. This begs a variety of questions. Namely, what can you do to adapt to the disruption?

Dealing with the Surge in Bankruptcies and Insolvencies

The rise in insolvencies and bankruptcies worldwide are adding major pressure to supply chains—potentially disrupting and forcing businesses to urgently find (costly) alternatives, putting suppliers at financial risk with nonpayment and resulting in large and expensive legal bankruptcy procedures.

The bigger the company filing for bankruptcy, the higher the risk of a domino effect that could push businesses already grasping to stay solvent further underwater. This according to a recent report from Controllers Council sponsor Euler Hermes has left many questions for leaders looking to mitigate risk.

This report, A Surge in Bankruptcies and Insolvencies: How to Keep Your Business Afloat, explores a variety of questions you need to ask yourself, providing thoughts on how to weather the storm. Today, we would like to share with you some of the key takeaways from this report and offer you an opportunity to read the entire document, courtesy of the Controllers Council.

What’s the Difference Between Bankruptcy and Insolvency?

Insolvency and bankruptcy are, at times, intertwined. Insolvency is typically the first step toward bankruptcy trouble for a business. Invoices pile up, assets deplete, and it becomes more difficult to pay invoices. However, just because the business is insolvent doesn’t mean it can’t make a sharp turn back toward solvency and promptly meet financial obligations.

But insolvency is generally able to be overcome—the challenge for a supplier like you is knowing what to do when a customer goes bankrupt.

Securing Your Money—What Type of Creditor Are You?

Bankruptcies may come as a surprise. Sometimes it’s a customer that’s always struggled to pay, sometimes it’s a reliable partner. But either way, it’s rarely good news—as they probably have an open line of credit. But when this happens, you need to know what kind of creditor you are in order to try clawing back some money. Typically, bankruptcy debt is determined to be preferential, secured or unsecured, in that priority order.

  • Preferential or preferred creditors can include employees of the company who are owed wages as well as tax authorities.
  • Secured creditors have liens on the debtor’s property (such as a financial institution that has loaned money for the company to purchase a building or vehicles).
  • Unsecured creditors are those that provided the company goods or services, such as suppliers and contractors.

How to File a Claim on a Bankrupt Customer

Once you discover what kind of creditor you are, the next step is to file a claim. If a company goes bankrupt and owes you money, you will receive a notice from the bankruptcy court detailing the action. That notice will include instructions for filing a proof of claim. A proof of claim is a written statement and supporting documentation that outlines why the client declaring bankruptcy owes you money.

To receive notice of the bankruptcy and a proof of claim form, the business that is declaring bankruptcy must list you as a creditor. If that does not happen and you learn of the customer’s bankruptcy another way, contact the customer and ask for the bankruptcy case number and the court in which the bankruptcy was filed. Call the clerk of the appropriate court and confirm that a filing has taken place.

Prevention is the Best Defense: Download the Euler Hermes Bankruptcy eBook

The rise in insolvencies and bankruptcies worldwide are adding major pressure to supply chains. When you extend credit to a client, you take a risk that the client will not pay, and your cash flow will be interrupted. With the COVID-19 crisis and the surge in bankruptcies, your key customers that struggle financially or declare bankruptcy could expose your business to loss.

Written by experts in trade credit insurance and collections, A Surge in Bankruptcies and Insolvencies: How to Keep Your Business Afloat shares a variety of must-know insights for mitigating the loss that might happen as a result of a customer bankruptcy. Get your free copy to learn about the unique challenges you may face if one of your customers starts proceedings.

Bonus: 2021 Outlook Webcast Featuring Chief Economist at Euler Hermes

In addition to providing us with this great report, Euler Hermes sent their Chief Economist Dan North to share his analysis in our 2021 Outlook webcast. Joined by Scott Peterson, Vice President U.S. Tax Policy and Government Relations at Avalara, these two provided us with some incredible insight on the steps to navigate the changes in 2021. Click here to register and watch on demand.

Additional Bankruptcy Resources

Myths and Misconceptions about Chapter 11 Bankruptcy

Three Alternatives to Chapter 11 Bankruptcy Organization Leaders Should Consider