What to do when a customer abruptly closes their doors 

Working in credit management requires a finely tuned eye for customer behavior. At times, you can’t help paying extra attention to a customer whose payments have slowed or companies you’ve had an increasingly hard time getting on the phone. But even the most eagle-eyed credit professional will have customers abruptly shut down without warning.  

Why it matters: Your first instinct when a customer suddenly closes their doors may be to panic, especially when they owe you money. However, there are steps to take in the wake of these incidents to protect creditors from oversized losses.

“The first step when a customer shuts down is to put the account on hold and make sure that everyone working in the field knows they’ve shut down so that no more orders are shipped to them,” said Deana Reynolds, director of credit for Edges Electrical Group (Sacramento, CA). “Then we have to contact our vendors to see that any pending orders are cancelled. At times in construction when the materials are customized, they cannot be cancelled without a restocking fee or cancellation fee. We typically pay it and hope to maybe sell that material to someone else.”  

It is critical that credit managers fully understand the situation before making any big decisions. Reaching out to your customer as soon as you notice their operations have halted can help you get a sense of what direction their business is headed.  

“Reach out to the customer and ask them a few questions,” said Jason Torf, partner at Tucker Ellis LLP (Chicago, IL) and instructor for NACM’s Graduate School (GSCFM). “Find out whether the company was sold or if it is shutting down. Find out if there is a plan to dissolve under state law, file for bankruptcy or pursue a bankruptcy alternative. Once you have a better sense of their plans, you can start to figure out what actions your company can take to recover the debt.”  

If the customer can provide a clear explanation for its sudden shutdown, then you – as a creditor – can formulate the best course of action for pursuing outstanding invoices. Communication between you and your customer does not need to end when the business shuts down, especially when creditors are left with unanswered questions and uncollected debts.  

For example, the sudden shutdown could be accompanied by a larger sale of that company’s assets. “If there was a sale of assets, you can then determine who the new owner is, whether you can contact them and whether they are taking on existing liabilities or leaving them with the old business,” Torf said.  

A big question on creditors’ minds when a customer abruptly shuts down is whether or not bankruptcy is imminent. A debtor’s decision to file bankruptcy, whether they do so within days of shutting down or within weeks, impacts a creditors’ ability to collect debts.  

It is important to understand the clawback provision in the U.S. Bankruptcy Code. When a company files for bankruptcy, any payments made in the 90 days leading up to the filing could be considered a preferential transfer that appears as preference towards one creditor over another and can be taken back. “Even if a customer has not filed yet, we want to act as if they are going to,” Reynolds said. 

Keeping a close eye on those customers who seem to teeter around shutting down can help you predict these abrupt closings, which can give you an advantage over other creditors when pursuing debts.  

“If a customer is shutting down, chances are pretty good that you are not the only vendor who’s owed money and who wants to try to collect,” Torf said. “If you take steps to try to collect, for instance by filing a lawsuit, you might find that there are other vendors that have already filed lawsuits or are about to. Then it becomes what is commonly referred to as the ‘Race to the Courthouse.’ It’s a question of which vendors can get a judgment first and start enforcing those judgments to collect on the limited assets that the customer might have left.” 

The best course of action is also dependent on the size of the customer. “For us, if the debt is below $5,000, we’re more likely to hand it over to a third-party collection agency,” Reynolds said. “If they are unable to collect, we will usually just write it off because the cost of a lawsuit doesn’t make sense for those smaller accounts.”  

The bottom line: When a customer closes their doors without warning, creditors may feel powerless as they are left with uncollected debt, but there are steps they can take to learn more about the situation to determine the best course of action that best protects their company from loss. Knowing the different options at your disposal can help credit managers make the best decision for each unique case.