The following is a guest post from David Dragich, corporate restructuring lawyer and founder of The Dragich Law Firm. Opinions are the authors’ own.
Corporate bankruptcies are rising fast. According to a midyear 2025 report from Cornerstone Research, 117 companies with more than $100 million in assets filed for Chapter 7 or Chapter 11 bankruptcy over the past 12 months — a 44% increase from the long-term average. Thirty-two of these filings were “mega bankruptcies” involving companies with over $1 billion in assets, the highest number since 2020. The distress is occurring across industries, including manufacturing, services, transportation and retail.
For CFOs, this trend raises a critical question: How do you spot signs of financial distress in your customers before it becomes a problem for your business?
A distressed customer creates cascading risks for a business. Late payments strain cash flow. Defaults on receivables create direct losses. Sudden demand changes disrupt forecasts and planning. And when a customer files for bankruptcy, payments can be tied up for months or longer, if any recovery occurs at all.
Today’s conditions make these risks even more acute. Many companies that borrowed at historically low rates in 2020–2021 are now facing refinancing at significantly higher costs. Others are seeing weaker demand, increased competition or margin pressure from persistent inflation and complications from factors like tariffs. These pressures often lead to liquidity problems before public signs of trouble appear.
That’s why having a proactive system for identifying early signs of customer distress is essential for protecting your business.
Warning signs to watch out for
While no single indicator is definitive, some of the reliable early warning signs of customer distress include:
Changes in payment behavior. When a previously reliable customer starts paying late, requests extended terms or begins making partial rather than full payments, it often signals deeper problems.
Order irregularities. Large, last-minute orders, sudden cancellations or unexpected delays may indicate cash flow pressure or supply issues. While some shifts reflect normal market dynamics, erratic behavior often points to internal stress.
Public signals. Credit downgrades, layoffs, restructuring announcements, “strategic reviews” or news of high-interest financing all suggest a closer review is warranted.
Personnel turnover. Departures of a CFO, controller or auditor — especially in quick succession — can be early signs of instability. Delayed financials or board-level disputes are also worth noting.
4 steps CFOs can take now
Once you’ve identified potential signs of distress, early action can significantly reduce your exposure. Here are four practical steps to consider:
1. Assess your exposure. Pull a current aging report and identify your largest accounts receivable. Pay close attention to outstanding balances, overdue amounts and customer concentration — especially if any single customer accounts for more than 10-15% of total AR. Prioritize risk management efforts accordingly.
2. Adjust credit terms. For customers showing signs of distress, consider reducing open credit limits, requiring partial prepayment or deposits, shortening payment terms or suspending shipments until balances are current. These changes can mitigate exposure while maintaining flexibility where appropriate.
3. Strengthen internal monitoring and escalation. Establish clear thresholds that trigger review and escalation. For example, payments more than X days past due or repeated requests for extended terms. Ensure your AR and finance teams are empowered to flag and escalate concerns when necessary.
4. Review contract rights and remedies. Reexamine your customer agreements to determine what protections are available. Do you have the right to suspend performance? Are you entitled to charge late fees or reclaim goods? Are your claims secured by collateral or personal guarantees? Clarifying these issues now ensures you’re prepared if conditions deteriorate.
You still may have to deal with a bankruptcy
Even with close monitoring, a customer bankruptcy may still occur. If it does, a few early decisions can significantly impact your potential recovery.
Act quickly to understand your rights. Review your customer agreements. Identify any unpaid goods recently delivered. Determine whether you have a security interest or other collateral. Stop extending credit or making deliveries unless you’re protected.
In most cases, it’s wise to consult with experienced restructuring counsel. The bankruptcy process moves fast, and early decisions often determine whether you recover a portion of your claim — or nothing at all.
It’s impossible to predict every bankruptcy. But in a rising-risk environment, it’s crucial to be vigilant and proactive.
The earlier you spot signs of customer stress — and the faster you respond — the better positioned you are to protect your cash flow, limit losses and avoid disruption. A payment delay or term change might seem minor in isolation, but when paired with broader market stress or other red flags, it could be the first step in a much larger problem.
