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Your customer has been struggling. Payments have been slower and slower. Then comes the good news. They've had an infusion of working capital. All past dues are cleared up, and now all payments are prompt. So are all the problems behind you? Maybe. Maybe not. It could be that there's much worse to come. The question is, "Where did this infusion of capital come from?" If it was from a bank or other traditional lending source, the customer's financial stability might be assured and the potential for future operation and growth may be bright. If it came from a hedge fund or private equity firm, the adventure (the customer's and yours) may only have just begun.

An estimated 75 percent of loans to struggling businesses now come from institutions other than banks, usually hedge funds, according to Edward Altman, professor of finance at New York University. What makes this trend so profoundly unsettling is that while banks usually have little alternative to seeking repayment of their loans, hedge funds and private equity firms are prepared to take over if the customer's problems continue and worsen.

And worsening problems may be structured right into the funding agreements. As well as taking all of the customer's assets as collateral, the lender may impose rates of interest (and penalties for late or missed payments) that can make recovery almost impossible.

"It's heads, I get my money back; tails I own the company," says David Heller, global co-chair of the insolvency practice group at the Chicago law firm of Latham & Watkins, noting that some have dubbed this the "loan to own" economic model.

"We're not vultures," protested the head of one private equity firm after having taken over a client's company that had gone into Chapter 7 bankruptcy and left all other creditors with nothing.

A representative of another lender who'd lost out ruefully agreed: "You have to give credit where credit is due," he told the Wall Street Journal. "The guy was smart and tough, and the other (creditors) were slow and flaccid in response."

The lesson here couldn't be clearer. If a troubled customer gets new funding, take the money and take precautions. Find out where the funding came from and under what conditions. Be alert to the first signs of trouble, because a total washout may not be far behind.

• bill-paying history to your company and your peers
• late payment data
• number of times placed for collection
• NSF checks
• data from credit reporting agencies
• financial data
• other internal and external data sources

Once the analysis necessary to create a credit scoring model has been completed, the model is implemented and information about current or potential customers is entered into it. The credit scoring model, usually a software application, then analyzes all of the information and produces a "score" for the customer.

Companies that are currently using credit scoring typically use it to:

• Assign an appropriate credit line or terms to a new or current customer
• Determine whether a company is likely to pay its bills on time
• Determine the likelihood a company will default or file for bankruptcy
• Measure overall risk