Unavailable financial information—so often the case when you are selling to privately owned companies—is a familiar problem in the best of times. Today it is beyond exasperating. It's increasingly dangerous. You may only have the customer's word and apparent condition to judge risk. You sometimes have to trust, but you also do your best to verify.

“The (customer company) is shutting down and liquidating this morning,” went the phone call received by a Tubular Steel, Inc.'s credit team member one morning in October. “The bank has liens on all of the assets of the company and is closing on those assets.  The amount of the bank loan far exceeds any recovery that will be achieved through the liquidation, leaving nothing for the unsecured creditors. Lawyers will be sending you a letter this week explaining all of this. Please wait to receive that letter. If you have further questions after that, reach out to the lawyers.”

In 2019, this customer had made total purchases of over $700,000, with as much as $160,000 owing at one time. As late as August, Credit Manager David Zahller had approved an order for $83,000. But he was operating more on intuition than information.

A privately owned steel-pipe broker operating in the oil patch, the company had been acquired by a private equity outfit in 2018. In terms of supplier relations, the former owner—who remained active with the company—and management of the private equity firm were joined at the hip. They refused to release financial statements, but financial management, first the private owner and now the CFO, were readily available for discussions.

There was, of course, great turmoil going on in the oil industry with wild price fluctuations. The Saudis, and the Russians were over producing in their attempts to crush the fracking boom, but the pipe broker customer seemed to still be riding the fracking wave. The CFO told Zahller that they had made so much money they had already paid off half of the acquisition debt. He went on to say that they had a $10 million revolving line of credit on which they owed nothing. He also made a verbal commitment to keep Tubular Steel on timely payment.

Because the customer had refused to share financial statements, a $100,000 limit was imposed. “But they kept giving us big orders, and they ended up having to front money to us,” he says. When the CFO committed to continue with 30-day payments, the limit was expanded. Then, Zahller complains, “They turned around and ran me out.”

“The first C of Credit is Character,” notes Zahller. “I'd figured that, if the best I could get out of him was verbal, I had no choice but to try to go with it. But, of course, I did make sure I was seeing timely payments of large balances and credit reports on other suppliers that matched up with what customer was telling us. I decided to roll the dice. ‘Okay, we'll work with you,' I told them.  But I kept that old rule in mind: Trust but verify.”

Verification found the customer's payments for that big order stretching out to 75 days. “When someone makes a commitment and doesn't follow through, we'll try to find out what's happening,” Zahller says. “If what we find out is not satisfactory, we take steps to keep that from happening in the future.” No more credit for this customer.

“What do we need to do?” asked the staffer who brought him word about the bankruptcy filing.

“There's nothing we can do,” he told her. “The letter will be enough support to allow the amount remaining on the account as a bad debt.” The amount remaining was $98.08.

The previous week, Zahller had told the salesman he had heard a rumor from another supplier that this customer was having problems. Two days later the salesman called. “I think you may be right,” he said. “I've been trying to call and no one is calling me back.” Zahller followed up after the bankruptcy notice, thanking the salesman for what he had tried to do. “You know how big these things can get,” he said. “I'll take a $98 write off.”

“Often in business we make things way too complicated,” Zahller sums up. “This one was pretty basic. You react the way you should when people do things without explanation. Nine times out of 10, you'll get the results you're looking for.”

Contact Information:

Phone: 314-851-9356 
E-mail:david.zahller@tubularsteel.com