Very few people go into business with the intention of not fulfilling their financial obligations. Companies usually become debtors after months, if not years, of financial hard times coupled with every effort possible to keep afloat. In our experience, all debtor companies go through three very distinct stages.

In Stage 1, the owner has the best of intentions. The company is starting to experience some hard times but genuinely thinks it is only temporary. At this stage, the owner still has a positive outlook and wants to try to do the right thing when it comes to paying his creditors. Unfortunately, he cannot pay everyone in full so he works out a partial payment arrangement with most of his suppliers. When a debtor is in Stage 1 they begin to act a little different and the signs of poor cash flow start to show:

Stage 1 Warning signs

• Your customer wants to make partial payments in an effort to get you paid
• It takes you two or three calls before someone will call you back about your bill
• They tell you that the check was mailed already when it wasn’t

Remember, during this stage the debtor thinks everything is going to be ok so his attitude is usually good and his excuses sound genuine. Unfortunately, Stage 2 is looming.

In Stage 2, cash flow is worse and the bills are getting out of control. Things go from bad to worse and he simply can’t afford to keep up with his payment plans. He hasn’t given up though, so his excuses still sound genuine; but they are getting more and more creative every day. Now he has to prioritize. When he finishes a job or gets paid from one of his customers he sits down with all of his bills and simply puts them in priority from MUST PAY to NEED TO PAY then down to WON’T PAY. He is now officially in survival mode. Some of the bills that fall into each pile are;

Rent Payroll The Electric Bill The Phone Bill Top suppliers that they cannot do without.

Advertising Bills Office Supplies Middle tier suppliers who provide products that they can get elsewhere.

Memberships Subscriptions Low tier suppliers they do not need Vendors with toothless collection policies Small balances that they know no one will ever pursue

Even though he is in survival mode, he is still holding out hope that things will get better; but he is walking the cash flow tight rope. One false move and his company will go under. Where do you think you fall on his priority list?

In Stage 3 the debtor's situation is hopeless. He can’t afford to pay anyone anything at all. No longer do even his preferred vendors receive checks. When he arrives at stage 3, the company will be closing its doors shortly or he is going to file for bankruptcy protection. Right before he enters this stage, the warning signs are clear and easy to read;

Stage 3 Warning signs

• Stops returning calls
• No more excuses, just states, “I can’t pay you”
• All partial payments cease
• Rumors of the company’s demise are rampant in the industry

Simply put, this debt is uncollectible. The person who normally tried to make the best of a bad situation has given up and the company will close its doors soon. In most cases, even if you have a personal guarantee it isn’t worth the paper it is printed on. The personal guarantee is signed by someone who has probably poured every last dime he had into trying to keep his company afloat. Since the company doesn’t have any cash flow, the time to use a collection agency has long passed.