RED FLAGS

“RED FLAGS” – CORPORATE

Do not ignore the signs of financial difficulty that signal collection action must be taken to mitigate potential losses. If you are the first to recognize that a debtor could fail and take action, you are likely to recover all of your money. If you are the last, your overdue balance is going to be treated as a write-off. If an account is timely placed after deducting our fee of approximately 15%, you will recover 85% of what you are owed. In most situations, a creditor’s gross margin markup will be more than 15%, thus by acting swiftly a profit can still be realized albeit smaller as opposed to a total write-off that will affect profits detrimentally dollar for dollar. At the end of the day, your company’s bills are paid; meaning whatever is lost to write-offs has a negative one on one affect upon profits. The most common corporate red flags are:

  • Current assets are not substantially greater than current liabilities
  • Failure to complete restitution on NSF check within two weeks
  • Two successive years of declining net worth
  • More than 10% of trade report vendors report “slow pay”
  • Lower trade balances current while higher trade balances report “slow pay”


  • Closing unprofitable location
  • “Other vendors are working with us”
  • “Our bank loan is in arrears.”
  • Paid report “alert” or downward rating revision.
  • Refusal to divulge financial facts (none of your business).


  • Unpaid loans to shareholders carried on the books.
  • The debtor’s business is less than three years old.
  • Sudden change decreasing net worth.
  • Cash raising sale in progress.
  • 20% or more decline in gross sales compared to prior year.


  • Shareholders refusal to subordinate their secured debt
  • Refusal to update Balance Sheet, Operating Statement or provide the latest tax return.
  • Refusal to immediately honor COD terms on an inadvertent open account shipment.
  • Incomplete credit references on the credit application.
  • Corporate officer or partner leaving.


  • Looking for investors.
  • Waiting for insurance proceeds.
  • Overdue IRS taxes.
  • Overdue State taxes.
  • No fax machine.


  • Other companies sharing the same offices.
  • Shared phone numbers.
  • “Moving the business” – new address unknown.
  • Request for extended terms.
  • No response to leave words.


  • In business less than three years.
  • Loans to officers.
  • Credit references representing only small balance history.
  • “Ship to” is a common warehouse shared by other businesses.
  • Inventory Levels are too high.


  • Reticence to provide current Balance Sheet and Operating Statement.
  • Only known address is a PO box.
  • Absentee ownership.
  • Increase in trade inquiries.
  • Employee layoffs.


  • Flat sales.


EMPLOYEE GENERATED “RED FLAGS”

In the credit grantor’s request for assessing risk interaction with debtor employees can sometimes be indicators of financial problems. The following are “Red Flags” that are raised by employees that should not be ignored:

  • “The check is in the mail.”
  • “The check has been cut but not released.”
  • “Paying your account will force me into bankruptcy.”
  • “You have defective product” (never previously mentioned).
  • “Other payables are more important.”


  • “We are struggling to meet payroll/rent.”
  • Voice mail and messages left on recording devices are ignored.
  • “Let me see if he/she is in” – call screened because the party answering the phone knows which employees are present.
  • “It has been slow” or “We are waiting for sales to pick up.”
  • “We are in the process of closing a location.”


  • “I’ll call you back” – but they don’t.
  • “I am with a customer – I can’t talk” – the debtor does not call you back.
  • Broken promise to pay.
  • Refusal to pay the undisputed portion of a debt.
  • Refusal to commit to payment in full.


  • The principals will not come to the phone.
  • “I am looking for investors.”
  • Refusal to sign personal guaranty.
  • Disposal of goods expecting offsets without vendor consultation (a creditor has the right to “cure”).
  • “I am not taking a salary.”


  • “I have no cash flow.”
  • “You are harassing me” or “You are threatening me” (debtor psychology in play).
  • Divorce proceedings – the decree does not relinquish remedies to pursue the original obligors.
  • Death of a corporate officer – the corporation is perpetual and debts are paid from corporate assets.
  • Illness – (sales are not being refused or turned down).


  • “Sales are not meeting break-even expenses.”
  • Employee embezzlement.
  • Employee was not authorized to make the purchase.
  • “My customer has not paid me.”
  • “My customer went bankrupt.”


  • “Our loan was refused by the bank.”
  • Construction in the street.
  • Layoffs in the area or military base closing.
  • “Our lease is too expensive and we are looking to move.”
  • “We have applied for an SBA loan.”


  • Phone calls not returned.
  • Answering machine intercept (principals are never in).
  • Expecting money from nebulous sources.
  • “Do what you have to do.”
  • “Slow time” (over a one year cycle a bank will lend money to a profitable company in a slow period).


  • The second-generation assumption of the business.
  • “We never see the owner.”
  • “He or she is in a meeting” (meetings do not last forever).
  • “Money is tight – we have opened a new location” (undercapitalized).
  • “The bank is calling the shots” (foreclosure is imminent).


  • An industry credit group member has placed the debtor for collection.
  • Death of a family member.

It may sound very simplistic, but our success to a degree can be predicted by the “85% GOLDEN RULE OF PLACEMENT,” which is Williams & Williams, Inc. can, after deducting fees, return 85% of what is placed provided the oldest invoice is less than 85 days old (55 days beyond terms). The keys to collection success are quick recognition of financial difficulties and immediate reaction to “Red Flags.”

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