Dear Norm,
So far this year, three of my customers have gone out of business without a formal bankruptcy proceeding. In each case, the bank—as the secured creditor—has taken all the assets and sold them off, leaving nothing for the trade creditors. If the cases had gone to bankruptcy court, we would have gotten at least a portion of what we were owed. If this is a trend, it's going to mean trouble for companies like mine. Is there anything I can do about it?

—Roger Cooper, chief financial officer
Spectronics, Westbury, New York

Unfortunately, there are times when somebody else's unfair, unreasonable, or even unethical business practices are simply a cost of doing business. I'm afraid that Roger Cooper's problem with disappearing debtors falls into that category. He told me they have cost him about $26,000 this year, of which $20,000 was owed by just one of the three. That money, he realized, was gone. He simply wanted to figure out how he might protect his company in the future.

So what are his options? Aside from checking Dun & Bradstreet reports, I could think of only two. One is to have his salespeople try to get financial statements from customers before making the sale. You can tell from a company's balance sheet how much debt it has and thus how much credit risk you're taking on its receivables. In fact, checking credit in advance should be a part of each salesperson's job, because a sale isn't a sale until you get paid. Roger's other option was to hire a specialized credit-checking firm that does in-depth analyses of customers' financial situations. Such a service, however, would probably cost Spectronics more money than the company would save by using it.

I asked Roger if he'd thought about selling Spectronics's services to the companies that had acquired the assets of his former customers. He said he had. I told him that was probably his best bet. If they were strong enough to do the acquisition, they could probably be counted on to pay their bills, and he might earn enough profit on their business to make up for what he'd lost.

Please send all questions to Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book, The Knack, is now available in paperback under the title Street Smarts: An All-Purpose Tool Kit for Entrepreneurs.