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How do you mitigate the risk of insolvency?

On Behalf of | Sep 1, 2020 | Business Law And Litigation |

In the course of doing business, many businesses do business with another company that will suddenly announce it is filing for bankruptcy. This can happen if, for example, your business delivers raw materials to a customer ahead of payment. If that business then declares bankruptcy, your company can be left high and dry. The good news is that there are ways to mitigate the risks. Getting ahead of the problem is important, especially if you spot signs of trouble ahead. Here are some suggestions.

Draft a supply contract. If you are not sure about the financial stability of a new customer, do not grant credit. Instead, take a payment upfront, and outline the terms of the transaction in an official contract.

Settle for a lower amount. When a business you do business with becomes insolvent, settling an agreement is often better than receiving no payment at all. Keep in mind that this is still a risk, as the insolvent company could still have trouble paying the lower amount.

File a claim.  If there is already pending bankruptcy, you can file a claim against the insolvent company. Once the bankruptcy proceedings are complete, you may be able to recover some payment.

Creditor’s rights are protected under the law, but those protections provide no guarantee that all or some of an owed debt will be repaid. The best way to mitigate the risks of insolvency is to take proper precautions before delivering products. The situation can become more complicated if the customer in question is a longtime business partner. For this and other situations, the legal help of a lawyer who specializes in business law and bankruptcy may be helpful.