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We have a customer with a deficit net worth of more than $50 million. Also, this customer has $1.20 in current liabilities for every dollar in current assets. At the same time, the company is publicly traded, and while this company's revenues are dropping it nevertheless has posted more than $1 million in profits in each of the last two quarters according to its 10-Q most recent filings with the SEC. The company in question has open account terms with us requires a credit limit of at least $50,000. How would you recommend handling this account?

Answer: Unfortunately, there is not enough information to make a credit limit recommendation. But, there is more than enough information to offer this advice: Because of the huge deficit net worth the decision about whether or not to sell to this customer should not be made by the credit manager - or at least not by the credit manager alone. Why? Because a deficit net worth of this size means that the credit department should not recommend terms other than wire transfer payment in advance. We think it is fair to suggest that a customer with this large a deficit net worth remains out of bankruptcy only because its creditors choose not to put the company into bankruptcy. Whenever this is the case, we are not aware of any rationale for a unilateral decision to extend a large amount of credit to the customer without senior management support.

 
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