When SMB Suppliers Head for Bankruptcy Court

Last week, I came across this little number from the New York Times blogs that raises the question: "How Many Small Businesses Will Go Broke During the Recession?" The answer, if you believe the analysis the Times performed, is far more than we might have expected. Indeed, the post notes "While the number of business bankruptcies has been going up since the beginning of 2006, the number of bankruptcies during the recession is well above the pre-recession trend. Of course the bigger question is when, if ever, the number of business bankruptcies will go back to that earlier trend."

How far above the trend line are we? If you go back to the first quarter of 2006 and trace small filings until the fourth quarter 2007, we see the number of quarterly filings from early in the period rise from 4000 to approximately 8000 at the end. Based on the trend-line, the Times forecast that filings should have hit approximately 10,000 in Q109. But instead, the actual number exceeded 14,000 (a 40% delta). Without question, since bankruptcies are a trailing indicator of the economy and small business lending and credit facilities have been disproportionately hit during the downturn, this number will climb even further. Which begs the question: what is your organization doing to proactively manage risk when it comes to small and middle tier suppliers?

If the answer is what I hear 90% of the time, it's probably "not much". Unfortunately, traditional information sources (e.g., third-party credit or risk scores) become much less reliable as company revenue drops below the $100 million threshold. In fact, one of the favorite selling tactics of one supplier content provider in the space is to tell their prospects that one of their competitors has data that suggests they are going out of business -- despite their healthy balance sheet and rising revenue. In other words, you can't trust risk data on smaller suppliers. But if this is the case, where can you turn? The best set of tactics is to closely monitor supplier performance information -- which it turns out is often correlated, from a negative trending perspective, with supplier financial viability -- while also compelling suppliers to provide quarterly audited financials.

Jason Busch

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