When a long-time customer files for Chapter 11 bankruptcy, vendors and suppliers face a difficult decision: should you keep supplying them, or walk away?
Maintaining the relationship could mean ongoing sales and the chance to support a customer through a restructuring. However, extending trade credit in bankruptcy or after a customer emerges from bankruptcy carries real risks.
So how can vendors protect their receivables while maintaining customer relationships?
The Risks of Selling to a Customer in Chapter 11
When a company files for Chapter 11, vendors who ship goods or services after the petition date generally receive administrative priority status. In theory, that means these claims must be paid in full before the company can emerge from bankruptcy.
But in practice, the story isn’t so simple. In recent years, a troubling trend has emerged: plans have been confirmed that do not pay administrative creditors in full.
Recent examples include:
- Toy’s R Us
- Sears
- Steward Health Care Systems
- Southern Food Groups, LLC
- Verity Healthcare Systems of California
These cases highlight a hard truth: priority claims do not guarantee payment.
(For additional context, see United States Courts: Bankruptcy Basics for an overview of Chapter 11 protections.)
Traditional Approaches Vendors Take
To manage this risk, vendors typically rely on one of a few strategies:
- Stop shipping entirely- Eliminates exposure but may mean losing a valuable customer forever.
- Cash on Delivery (COD)- Guarantees payment at the door but can create tension and reduce order volume.
- Prepayment or deposits- Offers strong protection but may be unrealistic for the debtor.
- Court-approved terms- Sometimes negotiated, but far from certain.
Each of these approaches offers some protection — but each also comes with tradeoffs.
Why These Approaches Fall Short
The problem with traditional methods is that they often force a false choice: either protect your receivables or preserve your customer relationship.
- Stop shipping, and you give up revenue.
- Demand COD, and you risk straining the partnership.
- Accept court-approved terms, and you’re still at the mercy of uncertain future performance.
What vendors really want is the ability to keep selling and protect their receivables.
This is where specialized receivables advance programs come into play. Unlike traditional factoring or merchant cash advances, these solutions are designed specifically for vendors doing business with bankrupt or recently emerging debtors.
Here’s how it works:
- Cash in days on new invoices — no waiting weeks or months.
- Risk shifted off your balance sheet — recovery is managed by the financing provider.
- Confidence to keep shipping — you can continue supporting your customer without putting your own finances at risk.
For vendors worried about whether their debtor may end up in a repeat bankruptcy or “Chapter 22”, this type of program provides both security and flexibility.
Protect Yourself While Supporting Your Customer
Vendors and suppliers shouldn’t have to choose between protecting their receivables and keeping a valuable customer. With the right approach, you can do both. Specialized receivables advance programs allow you to keep shipping, protect your cash flow, and avoid being left exposed even if a customer encounters financial distress or bankruptcy.
If you’re asking yourself “How do I keep doing business with my customer in or recently emerging from bankruptcy without risking my receivables?” — the answer is clear: protect your receivables now, so you can continue supporting your customer with confidence.
Chapter Advance by CRG Financial helps vendors protect their receivables while continuing to do business with customers in or emerging from Chapter 11 bankruptcy. To learn more visit www.crgfinancial.com/chapteradvance or contact: 201-266-6988.