12 Ways to Protect Your Company Against a Client Going Into Bankruptcy

12 Ways to Protect Your Company Against Client Bankruptcy

The number of businesses that file bankruptcy grows each year. With almost 800,000 bankruptcy filings in the last 12 months, according to a report compiled by the U.S. Courts, it is inevitable that you will have dealings with a client that finds themselves in this predicament eventually. Protecting your company while working with such a client is imperative for the security of your business, which is why we asked 12 members of Young Entrepreneur Council (YEC) the following:

How can you best protect your business when a large client is at risk for bankruptcy?

How to Protect Your Company Against Client Bankruptcy

Here’s what YEC community members had to say:

1. Avoid Single-Source Dependence

“In business, single-source dependence is problematic. Having one superhero employee is a problem. Only having one internet connection could be problematic if it goes down. In the same way, becoming dependent on one large client is unwise. Have several large clients so you aren’t left reeling.” ~ Ismael Wrixen, FE International

2. Ask to Be Paid Before Work Begins

“The best practice that will keep your company proactive from clients going bankrupt? Always get paid before any work is completed. At my digital marketing firm, contracts demand payment on the first of the month before that month’s work begins. It’s the most optimal way to fully protect your business from not only bankrupt clients, but ones that run the risk of being fraudulent.” ~ Kristopher Jones, LSEO.com

3. Keep a Paper Trail

“Keep notes and document everything in case you need to appear in bankruptcy court to go before the judge and make an appeal for payment. It’s important to also consider how much work you want to continue doing for that client given the risk you may not be paid. You will also want to create a plan that determines the rights to any work you have created but not been paid for.” ~ Murray Newlands, Sighted

4. Be Proactive or Quit Before It’s Too Late

“You may have to be proactive when working with unstable businesses; it’s wise to ask for a deposit up front. If you sense that a company is challenged or paying bills too slowly, pause the work before the liability has piled too high.” ~ Peggy Shell, Creative Alignments

5. Start Negotiating Now

“Once your client goes into bankruptcy, their debt to you is probably going to be wiped out. Get in as early as possible and start chipping away at it. Ask for 30 percent payment now, and extend the rest. Or ask for 50 percent and say you’ll cancel the rest of the debt. Do everything you can, and be flexible, to extract as much cash as possible.” ~ Aaron Schwartz, Modify Watches

6. Communicate Consistently and Assertively

“I had a client go bankrupt one time, but they were trying their best to pay off all of their vendors as a part of the bankruptcy. However, they were not able to pay off every contract, so some were erased. However, I got paid because I kept in communication with them consistently, had rapport, and was assertive without being too pushy. Make yourself as visible as possible to them, or get left out.” ~ Andy Karuza, FenSens

7. Get Paid, Don’t Float Payments

“The specific actions you can take in every situation are different, but protecting your business should always be the top priority. To do that, you’ll want to tighten your payment terms as much as possible. Think you can get net 30? Try for net 15. And then you’ll need to be rigid on those terms. Stop everything if they miss an invoice. You don’t want to be holding the bag when the lights go out.” ~ Ashish Datta, Setfive Consulting

8. Cut Your Losses and Diversify

“Once you see the possibility that your client will file for bankruptcy, it’s time to cut your loses and start searching for new clients to replace this one. Stop rendering services to minimize the debt, as it’s possible you will not get paid on services owed. Cut your losses and move towards the future. Of course, follow due diligence to recoup losses, but move on simultaneously.” ~ Marcela De Vivo, Brilliance

9. Increase Your Marketing

“Timing wise, it might seem like a strange time to increase your marketing spend without any guarantee of a future contract. But if you were able to land one large client, you can certainly land more. Take a chance and refocus on your marketing.” ~ Erik Bullen, MageMail

10. Revoke Their Terms

“Immediately after learning about a client’s financial hardship, it is time to revoke their terms. If your customer is even considering filing for bankruptcy, their payables are the first place they will start cutting back. If your product is critical to their operations they will find a way to pay you in advance, and in your benefit, they won’t be able to get terms elsewhere.” ~ Diego Orjuela, Cables & Sensors

11. Get Assurances and Payments

“I would be proactive about my financial relationship with any large client. If you hear rumblings about a potential bankruptcy, try to front-load your next several payments or get a written assurance that they won’t default on any of the obligations the business has to you. Get some legal assistance and determine what the best course of action would be for several scenarios  — get ahead of this!” ~ Bryce Welker, Beat The CPA

12. Adapt Payment Terms and Hold the Line

“Bankruptcy is something that negatively impacts everyone, but as a business owner you must ensure that your team isn’t at threat. Work with the client and adjust your payment terms to a “pay up front” model, particularly if you’re in professional services. This ensures that you’re servicing the needs of the client, but also being responsible to the health of your own organization in the process.” ~ Michael Spinosa, Unleashed Technologies
Thinking Man Photo via Shutterstock


The Young Entrepreneur Council The Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world's most promising young entrepreneurs. In partnership with Citi, YEC recently launched StartupCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.

2 Reactions
  1. Very timely and well written articles! Yhsnk you.

  2. Last sentence should be: Thank you.