This article is a guest post by David Dragich, a corporate restructuring attorney and founder of The Dragich Law Firm. The views expressed herein are solely those of the author.

Corporate bankruptcies are rising rapidly. A mid-2025 report by Cornerstone Research shows that over the past 12 months, 117 companies with assets exceeding $100 million filed for Chapter 7 or Chapter 11 bankruptcy, a 44% increase over the long-term average. Of these, 32 were "mega bankruptcies" involving companies with assets over $1 billion, the highest number since 2020. Distress has spread across multiple industries, including manufacturing, services, transportation, and retail.

For CFOs, this trend raises a critical question: How can you identify risk signals in a customer's financial distress before it becomes your own business problem?

Distressed customers create cascading risks for your business: delayed payments squeeze cash flow, accounts receivable defaults cause direct losses, and sudden demand shifts disrupt forecasts and plans. And when a customer files for bankruptcy, payments can be frozen for months or even longer, with uncertain recovery.

The current market environment amplifies these risks. Many companies that borrowed at historically low rates in 2020-2021 now face pressure to refinance at significantly higher costs. Others are experiencing weak demand, intensifying competition, or margin pressure from persistent inflation and tariffs. These pressures often trigger liquidity problems before public signs emerge.

Therefore, building a system to proactively identify early signs of customer distress is crucial to protecting your business.

Warning Signs to Watch

While no single indicator is conclusive, here are some reliable early warning signs of customer distress:

Changes in payment behavior.When customers who have historically paid on time begin delaying payments, requesting extended terms, or making partial instead of full payments, it often signals deeper problems.

Order irregularities.A surge of last-minute rush orders, sudden cancellations, or unexpected delays may indicate cash flow pressure or supply chain issues at the customer. While some fluctuation is normal market dynamics, erratic behavior often points to internal stress.

Public signals.Credit rating downgrades, layoffs, restructuring announcements, news of "strategic reviews," or high-interest financing all warrant deeper scrutiny.

Personnel changes.Departures of CFOs, controllers, or auditors—especially in rapid succession—can be early signs of instability. Delayed financial reports or board-level disputes are also worth attention.

Four Steps CFOs Can Take Now

Once potential distress signals are identified, early action can significantly reduce risk exposure. Here are four practical recommendations:

1. Assess your exposure.Pull your latest aging report and identify your largest accounts receivable customers. Focus on outstanding balances, overdue amounts, and customer concentration—especially when a single customer accounts for more than 10-15% of total receivables. Prioritize risk management measures accordingly.

2. Adjust credit terms.For customers showing signs of distress, consider lowering credit limits, requiring partial prepayment or deposits, shortening payment terms, or pausing shipments until balances are cleared. These adjustments can effectively control risk while maintaining flexibility.

3. Strengthen internal monitoring and escalation mechanisms.Set clear trigger thresholds, such as payments overdue by more than X days or multiple requests for extended terms, and ensure accounts receivable and finance teams have the authority to escalate issues when necessary.

4. Review contractual rights and remedies.Re-examine customer agreements to clarify available protections: Do you have the right to suspend performance? Can you charge late fees or reclaim goods? Is the debt secured by collateral or personal guarantees? Clarifying these issues in advance ensures you are prepared if the situation deteriorates.

Even with monitoring, bankruptcy can still happen

Even with close monitoring, customer bankruptcy can still occur. If it does, early decisions will significantly impact potential recovery rates.

Act quickly to understand your rights: review customer agreements, identify unpaid goods delivered recently, and confirm whether you hold security interests or other collateral. Stop extending credit or shipping until you have adequate protection.

In most cases, consulting an experienced restructuring attorney is wise. Bankruptcy proceedings move quickly, and early decisions often determine whether you recover part of your claim or nothing at all.

While it is impossible to predict every bankruptcy, staying vigilant and proactive in a rising-risk environment is essential.

The earlier you spot signs of customer stress—and the faster you react—the better you can protect cash flow, limit losses, and avoid business disruption. On its own, a single late payment or term change may seem minor, but when combined with broader market pressures or other warning signs, it could be the first step toward a much larger problem.