Industry Leaders’ Guide to Mitigating Customer Bankruptcy Risk Exposure



Jacob Whetstone

Director Credit and Accounts Receivable,


[0:00] Jacob Whetstone:

Alright, so I appreciate you for coming this morning. I know it’s early and everything. So thank you. This is the final of the four presentations I’m going to do. So I’m looking forward to doing this and getting over and being done with it. So, you know, we have a smaller group. And if you guys have questions, or if you have other best practices, by no means do I think I’m an expert in this, I do have some experiences, I’m going to share our experience from Danone’s perspective. But if you have other experiences, please feel free to share best practices. Stop me with questions, we can talk about it, if anybody else wants to come up and present them, I’m okay with that as well. So just, however, we want to go with this, but we just kind of go through it. And like I said, if I skip around, I apologize, but there is some reason to it. So some of the things that we’re going to talk about, it’s not necessarily in this order, but just kind of talk about the economy, by no means I am an economist. Kind of some of our history and again, this is really all from Danone’s perspective. So things that we have seen with dealing with risky customers, customers that are headed towards bankruptcy, some of the factors that lead to that, how we can avoid it if we can or least mitigate it somewhat, and then some action plans to follow.

So, again, I’m not going to say that there is a recession on the rise. I know, there’s a lot of people out there that think that the economy is going to turn a little bit south. As far as that goes. I know yesterday, there were some sessions with people from DNB and they shared some economic indicators that say that there could be a recession. But I have no clue. But that’s also some of the statistics as well as that, 70% of economists are predicting some sort of recession, or downturn by the end of 2021. So there is some risk on the rise. And I’m not super happy with this comment here. But the message I also want to share is regardless of whether a recession is coming or not, Bankruptcy and the risk of bankruptcy are something that you constantly have to deal with. And depending on different industries, different types of customers. There are different trends that are going on so for us and I apologize, I did this yesterday as well just I don’t know how many people are familiar with Danone so I’ll step back a little bit and explain who we are and who Danone is.

So we’re a dairy product company. Danone is a common brand here in the United States people know about us. So we make yogurt, we also have a lot of milk products. We bought a company called White Wave which makes silk milk, so we make that silk brand, the almond milk, the soya milk, some of those. And so that brought us into the plant-based arena as well. So we have a lot of plant-based products as well. So a lot of dairy products and a lot of plant-based products. We also have our shared service center so I also manage credit and risk for Evian Waters. We’re not drinking Evian here but Evian Waters, as well as Canada, is what we’re over as well. So that’s kind of my background so I apologize for skipping back there but that’s who Danone is and so that’s where we’re coming from. So going back to the point of this is that we need to worry about what’s going on in the economy and recession. But in reality, bankruptcy and that risk that’s associated with that is prevalent every time. So, in our industry, we have worked with a lot of dairy farmers that also help distribute our products. And right now that’s getting really tough with them because of the huge push into plant-based. So there’s a lot of people looking to buy plant-based stuff to get into really plant-based products as well that aren’t really dairy. So the true dairy farmers are really struggling. So we’ve seen some bankruptcies in that arena as well in that industry. So depending on the industry, it doesn’t really matter if there’s a recession or not, but just certain times, there’s always risk out there. So I don’t want to be a fear monger up here and say, the recession is coming, everybody panic or whatever, because we could always have to face the risk that could come with bankruptcy.

So there’s the point always, anytime we extend credit, we have to worry about the risk that’s associated with this and this is a slide I’m gonna skip a little bit. So some of this is just very basic. But again, just from our perspective, what are some things that we’re going to look for to try to help us decide whether we need to act a little bit differently or to worry about the risk that we see going on. So for me, you know, and for everybody, information is really important and the key is being able to understand it and so I’ll just talk a little bit about some of the things that we do it to know and to try to gather that information and some of the things that we’re looking for.

[4:23] Jacob Whetstone:

So, some of this is based on our own experience, it’s really easy to see how a customer is paying us, how they’re responding to us, how they’re communicating to us. So we try to take in any information that we can get internally, from just the credit and accounts receivable area. And again, payment is a big portion of that. And that’s one of the biggest signs helping to understand some of the cash flow crises that they have is whether they’re able to pay us on time or not. But we’ve also had a lot of experiences where customers will pay us perfectly on time until they declare bankruptcy. So that’s not always it either. So being able to gather other information as much as we can, is a big deal. By no means am I an expert at gathering the information or we have a team that does that. But there’s a lot of companies out there that specialize in that. So we’ve tried to partner with multiple different credit rating agencies that can give us information back. Some of them have different analysts that focus on companies that will research for us and provide information, some of them just pull whatever is in the news. So technology is a news aggregator.

So anytime a customer does anything that’s pulling the news, so we can just get different information about the competition, or about decision making, that leaders have or some of the other causes and like I said, maybe this is where the dairy industry has some risks. So it’s a specific thing to those certain things, but we can we try to use those other resources and we’ve tried to use multiple ones so we’re not relying on just one credit relating rating agency that gives their opinion, but we can get multiple different agencies so we can view a diversified opinion of the risk and what’s actually out there.

Now, the large companies, you know, an employee sneezes, and we’ll hear about it on the news. But the really big challenge a lot of those smaller companies face is that there’s not a lot that’s out there that companies are focusing on. So some of the partnerships we have with their credit rating agencies, they’ll go out, they’ll try to contact the customer for us, they’ll do an analysis, that we pay for, and we try to get them to help us understand those smaller private companies. But a lot of that we also have to rely internally on our sales team, our customer service team, to also give their point of view and you know, nothing earth-shattering here, but the sales team is always very optimistic. They always paint the prettiest picture. So if we go in and say, “Hey, we’re worried about this customer, what’s going on?”, they’ll usually tell us that it’s great. They’ll pay their bills, they’re willing to buy a product and so it’s also a lot of training from our sales team and trying to get them to understand the end game of what we’re trying to get and to be really truthful for to us and not so optimistic if unless it’s warranted.

But we are really trying to use all internal resources that we can as well. But the biggest key is just trying to understand bankruptcy is somewhat of a crystal ball exercise, but as much information as we can make the biggest differences. And so again, we use a lot of outside credit rating agencies, as well as the internal information that we have to help us to get that information to determine risk. So again, not necessarily how to stay away from bankruptcy, I should have changed that as well. I want to just talk about more of a proactive approach. The proactive approach starts back to when a customer applies for credit, and what we try to look for as far as that goes, and then the to-do list during bankruptcy. I’ll talk about that a little bit just from our perspective, and kind of what we do there.

[7:54] Jacob Whetstone:

So more of a proactive approach. And this works really well for us, and the point may be a little bit out of order here but this is kind of what I wanted to talk to you through. So, for us, one of the things that works really well, and so we’re about a $6-$7 billion company. So we don’t have a lot of sales. But my guess is if I were to compare our customer base to a lot of other companies, our customer base, ours are actually probably really small compared to that. And a lot of that is we partner with our logistics team and for their purposes, they really like having minimum order quantities in order to sell to a customer. So it makes a lot of sense for our logistics team to save a lot on transportation costs. But we really like it as well, because we don’t have to deal with a lot of small customers from a credit standpoint. In order for them to get our product, they have to go through a wholesaler or a distributor. So we really partnered with our logistics team and it makes that work great for us. So we don’t have to deal with a lot of the small mom and pop, some of the smaller niche customers, if they want our product, they have to go through some of the major wholesalers or distributors. And actually in the news recently, there’s been a couple of bankruptcies that have happened recently with grocery chains and grocery stores, and we’ve had zero risks with those because they’ve all gone through our distributors.

And so we don’t carry that credit risk. So it’s been really beneficial for us. But we can also use it not necessarily just for a minimum order quantity, but if a customer applies for credit for us, and maybe they say they’re going to meet the minimum order quantity but the review that we get back on that customers that they’re very high risk, we can kind of encourage them to go through a wholesaler as well to get our product, at least initially, until they can prove that they’re creditworthy with them, and then we’ll be willing to take them on. So we can push a lot to our wholesalers or distributors. And again, I understand that may not be the same for everybody. Our brand right now is something that people want and so they’re willing to maybe pay a little bit more to go through a distributor or wholesaler before they can get credit with us directly. But that’s been really great for us being able to push that and limit our customer base.

Again, like I talked about being able to use multiple credit rating agencies to help us understand the ratings that we get, and what kind of terms and other things that we want to offer, and not just relying on one, we’ve had a lot of experiences where one credit rating agency will say, “Yes, they’re great, do business with them”, and we find out that they’re not or kind of vice versa. So as many as you can diversify in order to that as well. So now we use a company called F&D Reports, or Credit Intel, they go by two names. I don’t know why they have two names, but they specialize a lot in the food and beverage industry, they have a good base in that. We also use a company called Credit To Be and then Dun and Bradstreet are what we’re currently using right now. So right now really those three and we partner really good with FND. And so they’re ones that if we have a private company that’s a little bit smaller, they’ll actually we can make requests and they’ll go out and try to do their analysis on that if it’s not part of their base. And so we use them probably more so than the other ones. But I don’t know if there are others that people you know with an experience out there but I don’t know if anybody has anyone else they really like, or they found helpful. Okay.

[11:15] Jacob Whetstone:

I know there’s a lot of companies out there, I constantly get phone calls with them trying to sell their stuff to us. So I’m sure there’s a lot of really good ones out there. So this one is kind of making sure that once we understand that information that we’re starting out on the right foot, and we’re not afraid to make customers pay cash in advance in order to get our products which a lot of times sales team is not happy about because they want to just it will restrict sales sometimes depending on the customers. But based on that information, we try to make sure that we start out on the right foot again, give them a trial period making them pay cash in advance until they can prove their creditworthiness and then we’ll offer terms. I honestly did not write this in there. I have no clue about records there, and what point they’re trying to get with. So just ignore that piece of it.

But the personal guarantees. And I know there’s a lot of opinions and theories about personal guarantees. To be honest, the way that we have a credit application is we host an online credit application through another provider, not HighRadius. I know HighRadius can do it, though, but we have another provider that does that, where we just give a website and the customer goes out and fills out an application, we have required fields and some not required fields. And in that online application, there is a personal guarantee that’s there. It’s not something that we require. But just because it’s there and part of the application, we actually have a lot of customers that actually will fill that out. And so we do have a personal guarantee. Again, it’s not something we really push. If we go back and we do our credit review and it’s not very good, then we will go back and say, “Hey, if you want to carry with us, we need a personal guarantee”. I know there’s a lot of controversy about there, whether you can enforce a personal guarantee and all that stuff. And that’s what we’re not really worried about, but at least if we have one on file gives us options if something does happen but a lot of those customers that started really struggling to pay us when we go back and say, “Hey, we have this personal guarantee, it gives them extra incentive to make sure that they put us on top of the list in order to pay us”. So we don’t really ask for this a lot, but it’s amazing by just having it as part of our application process we actually get a lot of them filled out and completed.

It’s an online one. So as they fill out a page, you just click next to fill out the next information. And it’s just one of those pages as they’re clicking through that they do and a lot of them will just fill it out. And we’re not trying to be deceptive or anything like it says right at the top and very bold letters personal guarantee and there’s some legal language with us so much like we’re trying to trick them, we’re just not actively saying it’s there anything but they fill it out. So it works for us. Then this kind of bottom one isn’t really so much wider, setting out the credit application, but it’s more when we’re starting to do business with them and we start noticing a lot of problems. We’ve used like UCC: Uniform Commercial Code. I’m drawing a blank here now. It’s in one of my other sites. But yes. But with a forbearance agreement, and that’s also what I shouldn’t put in here. So we use a UCC with a forbearance agreement that we get the customers to agree with. So UCC just gives us a preferred claim on that customer if they were to go into default. And we can take a UCC on different things, so we usually take the UCC on with a customer, their accounts receivable, or their inventory, so their assets that we can quickly convert to cash. What we’re trying to take a UCC on, so if they do default, we can take ownership of that, and we then start collecting on their receivables and we get to keep that cash in.

A lot of companies try to get the UCC and depending on the order that you get it in and may not be as powerful. A lot of times if the company tries to get a loan with a bank, they have to sign a UCC over to the bank. So we work with our legal team to do the check to see what order we’re on with the UCC and try to get it. So we were actually the first in line, quite a few of the handful of customers that we have. And again, it gives us a lot of leverage with them. And then the forbearance agreement with that, as well as, if we’re putting them on a payment plan, we’re saying that if they don’t follow through with their payment plan, we’re going to exercise that UCC. So even if they’re not going into default, the forbearance agreements that we have in place will allow us that if they do fall in that payment plan, we can still exercise that UCC and take over their receivables. I’ve only had one customer where we’ve had a UCC and they have filed bankruptcy but ended up working out really good because we were able to then exercise that UCC in taking control of their receivables, we were able to collect quite a lot of money against our debt. And we were able to have that where we probably would have not had anything had we not had that in place. So as customers start to struggle, this has been a good tool for us. And again, it really depends on the type of customer and how many other UCCS they have in place and other things, but it’s been good for us, especially if we can get in there from the start and get that UCC’s first edition.

[16:00] Jacob Whetstone:

So one of the products that we sell is frozen yogurt brands. So if you go into like a frozen yogurt shop and you go to the machine and you fill your cup full and all that toppings and stuff. So we sell some yogurt to that. And those distributors are a very unique set of distributors and kind of in a niche market for that. And all of our UCCS are against those customers because the whole industry has just been very volatile over the years. And so that right now that’s the one we’re really focusing on. And, luckily for us banks, no one else has had UCC so we’ve been able to get in very quickly and be the first one that has UCC with those type of distributors, but it’s been mainly for the frozen yogurt product.

So we outsource that to an outside legal counsel. So we do that. But it’s been worth it for us. So you know, I know there’s a cost with that. But it’s been very helpful for us. Yeah. And the one that we had to exercise it worked out perfectly for us to actually use that. So there are just some proactive approaches to how to try to deal with that and deal with some of that risk. So this isn’t really a to-do list. And that’s where I struggle a little bit, I guess that during the bankruptcy part I struggle with. So just kind of ignore that a little bit. But as customers start going bad again, and some of this is just really basic stuff. We’ll go over kind of quickly, but yes, trying to identify our customers and different risk categories, just making sure we understand that risk. So again, using all that information that we’ve been given to put them in different buckets, and then based on those buckets act differently from how we’re going to try to collect with them. So especially those customers that are high risk, making sure that we’re really on top of that we understand what’s going on. We still want to have good payment terms and we don’t want to necessarily treat them differently than the other customers. But we know that we have a little bit more leeway with the low risk customers. Again, use cells to help us contact the customers, especially now where more and more customers are going to their own shared service centers, going to their own portals, it’s harder to find a person who actually talked with a lot of the customers, with cells we always have the contact.

So using sales, customer service, some of those other things, and then making sure that we have good payment plans in place if we need to, and where we can secure those payment plans through forbearance agreements or other things, having those in place with it. So again, nothing too earth-shattering there, but just some of the things that we do to try to help as work as they’re preparing for bankruptcy. Now, hopefully, credit professionals, I’m sure you have a lot of experience with this. But the other thing that I didn’t list out that I thought about is just making sure that you’re aware of any preference, risks or whatever you could have with that. So if you do see a customer that looks like they’re going under if you try to push them into a different payment plan, there’s something else you could be subject to preference claims if they were to filed within 90 days of that and it’s not viewed as normal course of business. So if we see a customer that looks really risky, and we want to move them, you know, to try to push them harder to pay, we don’t and they started letting receivables age it’s not like we can say- Okay, we’re going to hold all your orders and we’re going to release an order when you pay the oldest invoice, because there’s a lot of risk with that will get back so well you know that point will have to go cash in advance and make sure that they pay for the order that’s on hold before you release it and we have less preference risk with that than them trying to pay some of the older invoices. So just be aware of preference and the opportunity, and the risk that is associated with that of potentially having to give money back if they do declare bankruptcy, but I did want to bring that piece up.

So we actually have we’ve had a pretty good record of being able to defend them and a lot of that is because once we see all that information, it lets us know that the customer is defaulting, we do usually put them on credit hold and make them pay for that order in advance and if we are able to get additional payments, for some of the older invoices, those we’ve had to get some of that back. But usually, at that point, they’re struggling to make the payments just on the normal order anyway, so we’re not getting a lot of those additional payments. So we’re just able to mitigate, at least stop the risk from growing by making sure that they pay in advance. And we’ve not had to pay any of that stuff back. But yeah, it’s just really making sure and we work a lot with our outside legal counsel on that an approach that we take with each customer in each situation, but just really making sure that it does look like a normal course of business for us.

[20:28] Jacob Whetstone:

And I’m actually not even going to the next slide really. Well, I’ll go to the next one. But the next slide actually didn’t turn out the way I wanted it to. But again for us and this is just our experience of what happens when a customer does file bankruptcy. So if I come in the morning and I find out that a customer filed bankruptcy, it’s usually something that we’ve been expecting so hopefully we put a lot of those plans in place to mitigate it as much as we can. But we immediately stop all shipments make sure that the account truly is on hold. Nothing else is going out. If there are any trucks that we can pull back, we go in and we pull those trucks back, we work with our logistics teams to make sure we get the product back as much as we can. And then within our system, we create basically two customers, we create a pre-petition customer, and then we create a post-petition customer. And then that post-petition customer, the terms on that is cash in advance, right away. And so if it’s chapter 11, and they’re going to keep ordering from us, and they want to keep their business going, that’s great. But we’re going to try to make it cash in advance unless we have agreements already in place. So we also need to understand what agreements are in place. So one of the cuts the dairy farmer customers that just declared bankruptcy last November, we did this same thing and then they pulled out an agreement that they had in place with us that the court was able to force that we had to follow that pre-negotiated agreement that was in place so we did have to extend terms with them.

Now after bankruptcy, there is some protection around those that hopefully, we’re more likely to get that back as long as they stay in that chapter 7 or chapter 11 bankruptcy. But also understand what agreements you already currently have in place with that. And if you can change those agreements, this customer gets more risky before they file bankruptcy, you’re in a better place, because after they file bankruptcy, then you may have to honor those agreements and extend terms or do other things that are in those agreements. So be aware of what agreements you have in place. But if we have to extend the terms, we will extend the terms. If not, we’ll go cash in advance until we can understand more about what’s going on. We watched the court cases, the biggest risk is they would turn from chapter 11 to a chapter 7, and then we won’t get anything back. But it’s really then just trying to stay on top of that understanding to make sure that we file the claims, we separate anything that could be for preference that we may have to pay back, we reserved for that piece of it. We also look at any final three benign claims or any of the orders that ship 20 days in advance of their bankruptcy to make sure that we’re on top of that and if there’s money available to pay off those file nine claims that we’re filing our claims on time getting that back and everything but then it’s just really staying on top of that. Working with cells understanding what strategy cells have for them going forward and deciding whether or not we’re going to win or if we’re ever going to extend terms to that customer again. And that’s kind of what the next slide says. But I’m not very happy with what all it came down to. But that’s really kind of how we approach those customers and work with them.

Again, I think, this is our experience with Danone again, and we don’t have to deal with this a lot, luckily, because of the fact that we go through so many wholesalers or distributors as well as the major customers. So maybe once a year, we have a big bankruptcy. There’s always a little bit of smaller ones that happened, but we don’t necessarily have to deal a lot with those. So for us, it works really well the way that we’ve been approaching it and especially trying to mitigate that risk through the wholesalers, distributors. I would say it has been our biggest thing, but also just staying on top of everybody else to make sure that we’re doing as much as we can to mitigate the risk. So actually, I think that’s kind of all I had.

So thank you.

[23:58] Anchor:
Thank you, ladies and gentlemen, for being a great audience this morning. We have more sessions beginning at 9:45 today and then we also have our last general session at 10:35 on the field.

So enjoy the rest of your day.

[0:00] Jacob Whetstone: Alright, so I appreciate you for coming this morning. I know it’s early and everything. So thank you. This is the final of the four presentations I’m going to do. So I’m looking forward to doing this and getting over and being done with it. So, you know, we have a smaller group. And if you guys have questions, or if you have other best practices, by no means do I think I’m an expert in this, I do have some experiences, I’m going to share our experience from Danone’s perspective. But if you have other experiences, please feel free to share best practices. Stop me with questions, we can talk about it, if anybody else wants to come up and present them, I’m okay with that as well. So just, however, we want to go with this, but we just kind of go through it. And like I said, if I skip around, I apologize, but there is some reason to it. So some of the things that we’re going to talk about, it’s not necessarily in this order, but just kind of talk about the economy, by no means I am an economist. Kind of…

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