Assessing Your Provider’s Financial Stability
There’s nothing worse than hiring a logistics provider or carrier, then having it file for bankruptcy or close shop the day before you have a huge shipment planned for a new customer. Danny Monson, president and CFO of States Logistics Services Inc., offers these tips for verifying a service provider is financially stable—before you start a relationship.
1. Research the company’s credit history. The simplest way to assess a potential partner is getting its Dun & Bradstreet number, then running a credit report. This could help you better understand the provider’s payment history with other vendors, and gives you an opportunity to mention any details that concern you. Credit reports are not always black-and-white, but they do give you insight into the company and enable you to ask relevant questions.
2. Call references. Don’t just ask for references—take the time to actually speak to someone. It’s not enough to just send an information sheet. You’ll get more details from a personal phone call.
3. Request and review a financial statement. Many companies are privately held and do not generally release financial information, or do not have a statement prepared by their accountant. Depending on your situation, this may not be a big deal—for example, if it’s a small vendor, and you’re moving low volumes, the risk may be low. But if the vendor is more strategic to your business, you should press further to get this information.
4. Verify bank information. Get the provider’s bank information, and find out how long it has had the account. Using several banks and switching frequently is not a good sign.
5. Find out if the provider has a revolving line of credit. If the provider’s bank has extended a line of credit, that could affirm its credit worthiness. If the company does have a revolving line of credit, find out how often it is used. Is the provider carrying a sizeable debt, or does it use the credit line occasionally for cash flow purposes? Is the provider’s business supporting its cash flow needs, or is the company increasing its debt—and maybe having some financial issues?
6. Assess how leveraged the company is. If the provider has a number of liens or UCC filings, they will appear on a credit report. This information can help you determine the company’s secured creditors, and provide further insight into any "off balance sheet" transactions the vendor may have entered into.
7. Inquire about the provider’s federal tax ID number. Determine how long the company has had the number. A short time in business, or switching its corporate make-up frequently, are red flags. If you still want to pursue the partnership, you definitely need references.
8. Review the company’s insurance coverage. Low coverage or lack of coverage (no umbrella or employee theft coverage, for example) could indicate a financial concern.
9. Assess the impact your business volume will have on the vendor. Thoroughly review the provider’s current business. Will your volume help grow the company—or stretch it too far?
10. Understand the provider’s business growth plan. Partner with a company that continues to invest in its business—for example, developing new products and services.