RED FLAGS THAT MAY SIGNAL YOUR DOT-COM CUSTOMER IS FALLING FROM CYBERSPACE AND INTO INSOLVENCY.

As the credit department evolves into one that builds on customer service, there is greater pressure for the credit professional to work with the sales force to find a way to "make the sale." The Internet is transforming the way vendors bring their goods to market, creating new opportunities for vendors to sell their goods with the advent of the dot-com.

However, the press is abound with stories of the dot-com shakeout. Bankruptcies and consolidations are sweeping Internet businesses, including a number of initially well-funded, leading-edge dot-coms, leaving vendors unpaid. It is predicted that three quarters of the dot-coms will cease to exist, either through consolidation or bankruptcy within five years, according to one venture capitalist. Liquidation is a growth industry in the dot-com world. Unfortunately for the vendor, liquidation of a dot-com yields little or no dividend on the vendor's unsecured claim. The reason is the perishable nature of a dot-com's assets: value is primarily intangible assets, such as computer software, proprietary technology, licenses and contracts. A dot-com rarely has tangible assets.

Given a vendor's opportunity for meaningful sales to dot-coms, yet the recent risk of their failure to pay, what are red flags that may signal the dot-com may not meet its trade obligations? By comparison, the value of a "brick-and-mortar company" is usually tangible assets, the red flags of financial problems may be gradual, and the timetable for the "old economy" company to correct those problems may be substantial. With a dot-com, the slide into insolvency can be abrupt because of the lack of tangible and intangible assets, and the source of financing operations is usually limited. The vendor must be especially vigilant with a dot-com account and be prepared to act when a red flag is identified.

Beyond the obvious red flag of a dot-com failing to pay according to invoice, the following red flags may indicate that the dot-com may soon be insolvent:

Excess cash burn rate. This is the amount by which a dot-com's expenses exceed its cash flow. Start-up dot-coms usually raise a year's worth of cash to operate at a time. The adage "cash is king" seems especially true for dot-coms, given their lack of alternatives to finance operations. To determine how long cash may last and the prospects for payment on a credit sale, the credit professional may divide the dot-com's burn rate by the amount of cash it has. If the dot-com is publicly traded, the credit professional may look to the quarterly burn rate. A high burn rate will result in the dot-com's inability to finance operations.

Source of financing stalled. Dot-coms are usually financed by venture capitalists or owners using their own money. Dot-coms, as a rule, cannot obtain traditional financing from banks or asset based lenders because of their short operating existence and lack to assets to offer as collateral. Investors finance the dot-com start-up for a period of time before expecting to be repaid through profit or an initial public offering of the dot-com's stock. Given the tumult with dot-coms, a publicly traded dot-com has limited prospects for additional funding from the public market. With a venture capital-financed dot-com hoping to cash out with an IPO, scores of dot-coms have had their proposed IPOs stalled. Venture capitalists are now reluctant to provide an additional round of financing for a financially struggling dot-com. With the source of future capital stalled, more dot-coms are running out of cash and are faced with either shutting their doors, finding a buyer, or securing cash at an extraordinary price.

Management and key employee departures. Unlike many brick-and-mortar companies, the value of the dot-com may be the intellectual property that is in the hands of management or key employees. Their departure may have a significant impact on the dot-com's continued operations, and thereby jeopardize repayment of a vendor's open account sale.