The Retail Bankruptcy Apocalypse!
“The Retail Bankruptcy Apocalypse!” A phrase you have likely heard or read in the news; perhaps written in scary font from a 1950’s horror movie. The consistent roll call of retail bankruptcies is wreaking havoc on ill-prepared suppliers. While apocalyptic may be a bit of an exaggeration, retail bankruptcies are, without question, harmful to creditors. What can you do to protect your business from retail bankruptcy?
Secured Transactions – Even on Consignment
Article 9 of the Uniform Commercial Code (UCC) provides an opportunity for trade creditors to secure their goods and/or accounts receivable by leveraging the personal property assets of their customer. Properly perfected security interests via UCC filings will mitigate (though not eliminate) risk.
In retail, creditors frequently engage in consignment sales. Creditors will tell us, “It’s alright, we sell on consignment, we’re protected.” But that’s not always the case **cough cough, Sports Authority, cough cough**.
How does a true consignment work? The consignor/owner retains title to the delivered goods, while the consignee/recipient holds and attempts to sell the goods. If/When those goods are sold, the owner’s security attaches to the proceeds of the sale. If the consignee is unable to sell the goods, they can simply return the goods to the owner. However, to maintain title to those goods, you must perfect a security interest via a UCC filing.
But Wait, There’s More!
In addition to filing UCCs, there are other steps you can take to protect yourself in the event your customer files for bankruptcy. Here are some additional tips from Stephanie Wickouski’s article, Avoid a Catastrophic Loss from a Customer’s Bankruptcy – Five Tips.
Up first? Recognize the warning signs of default or financial distress.
“These signs include increasing degrees of lateness in paying invoices and communication anomalies. Communications might be irregular in a variety of respects, ranging from uncharacteristic unresponsiveness to effusive assurances that all is well and “the check is in the mail.” A troubled customer may also try to appeal to the vendor’s sense of loyalty, in order to lull the vendor to continue to supply goods despite growing delinquencies.”
Next? Ensure you have established terms & conditions.
“Terms and conditions which provide for interest and legal fees if payments are delinquent, or damages if the conditions are violated, potentially increase the amount you can claim and recover in the event of a bankruptcy.”
And? Consider withholding shipments until the account is current.
“Once payments are delinquent, consider moving to COD (cash on delivery) for new orders, or declining to ship further goods until the account is brought current.”
Wickouski also mentions you may want to move to consignment terms. However, be aware that even consignments should be secured through a UCC filing.
Then? Watch deliveries & mind the 20-day clock.
“State law generally gives vendors a right to reclaim goods from an insolvent buyer within 20 days of delivery. If the buyer files bankruptcy, the reclamation period is extended to 45 days. Payment for goods delivered within 20 days of the bankruptcy may be entitled to a priority of payment.”
Lastly? Maintain communication.
“It’s always better to be communicating regularly with a customer. Even if things head south, vendors who are regularly in touch with a customer fare better in a bankruptcy than those who do not. Frequent communication with a customer will allow you to know more about the customer’s circumstances (and to know it earlier). This knowledge will allow you to make more informed decisions to manage the account.”
Thinking of changing an invoice date to extend a lien deadline? While it may be tempting to alter an invoice, don’t do it! As one contractor discovered, a fabricated invoice date may lead to an invalid mechanic’s lien. Click here for details.
- November 26: Implementing a UCC Program: Overcoming Obstacles
- December 3: Implementing a Lien/Bond Claim Program: Overcoming Obstacles
- December 10: Due Diligence When Selling to Minority Contractors
Don’t forget to bookmark our Events Page!