Credit professionals rely on multiple inputs when evaluating risk, but many continue to place outsized weight on a company’s payment trends. Relying heavily on payment history and current behavior is no longer sufficient and can be misleading.
In today’s environment, you are likely to have customers in your portfolio that are already failing yet show no obvious signs. Payments are current, and communication remains strong. This is the “cloaking effect,” a phenomenon that often catches credit teams off guard. The cloaking effect occurs when companies continue to pay invoices on time right up until a bankruptcy filing, effectively masking underlying financial distress and delaying warning signals until it’s too late.
Effective credit analysis should extend well beyond payment behavior and incorporate a broader set of indicators. This includes a thorough review of financial statements, an assessment of liquidity and cash flow, and a comprehensive public records search—such as liens, lawsuits, and UCC filings—that may signal underlying stress. Just as important is an understanding of the company’s end markets and broader industry conditions, which can materially impact stability and future performance.
A recent example is West Marine. Based solely on the company’s payment trends over the past 12 months, there were no clear warning signs. No significant deterioration, no severe delinquencies, and no notable collection activity. From a payment-data perspective, the account appeared stable.
However, underneath the hood, the company was facing mounting financial pressure, including a high debt burden, declining sales, and ongoing supply chain issues. This led to the company filing for bankruptcy protection on May 17, 2026. The top 30 unsecured claims against the company totaled $65 million.
Don’t be fooled by the cloaking effect. A 360-degree view of risk provides a more accurate picture of a company’s true health, offering early warning signs that payment data alone would miss.
