When a company starts to struggle, and the media begins to report on its possible bankruptcy, vendors get spooked. No company wants to ship merchandise it will either not get paid for, or that it will receive pennies on the dollar for in a bankruptcy filing. There's no exact formula for when a vendor might decide to either cut a merchant off, ask for cash up front, or demand better terms in order to account for the potential risk of not getting paid, but it happens as the perceived risk of default increases.

That's what's happening to Sears Holdings (NASDAQ:SHLD), a company that has already issued a formal warning that it may not survive. CEO Eddie Lampert considered that March 21 SEC filing a technicality, but some of the chain's vendors are less optimistic about the company's chances for survival. That has led to the CEO lashing out against some of the chain's suppliers, whom he sees as trying to profit from the situation.

"As I explained last week, there have been examples of parties we do business with trying to take advantage of negative rumors about Sears to make themselves a better deal -- a deal that is unilaterally in their interest," he wrote in a May 15 blog post. "In such a case, we will not simply roll over and be taken advantage of -- we will do what's right to protect the interests of our company and the millions of stakeholders we serve." Sears Holdings owns both Sears and Kmart.

A Sears store

Vendor problems are the latest issue for Sears. Image source: Sears.

A difficult fight

Lampert used the word "rumors" and cited "the recent wave of dire predictions about our company's future," without acknowledging that the company itself did declare that it may not be able to survive. The March 21 SEC filing acknowledged that its "historical operating results indicate substantial doubt exists related to the company's ability to continue as a going concern." It also noted optimism, however, writing "We believe that the actions discussed above are probable of occurring and mitigating the substantial doubt raised by our historical operating results and satisfying our estimated liquidity needs 12 months from the issuance of the financial statements."

Lampert has aggressively tried to play off that SEC filing as a legal requirement while laying out his plans for a turnaround. Those efforts involve selling off assets, closing stores, and building the Shop Your Way digital platform.

The media has been skeptical that those plans will work while acknowledging that Sears still has assets. While the company has significant debt, it can likely meet its cash needs for this year, and probably 2018, assuming it can sell off its remaining assets at the expected prices.

Vendors should be scared

In Lampert's blog post, he calls out one specific vendor, One World, which he notes is a subsidiary of Techtronic Industries, a conglomerate based in China with over $5 billion in revenues. He said that the company, which Sears has purchased from for nearly a decade, refuses to meet the terms of its current agreement.

"One World has informed us of their intention to take the very aggressive step of filing a lawsuit against us as they seek to embarrass us in the media to force us to let them out of their contract," he wrote.

Lampert argues that Sears has lived up to its agreements, paying One World more than $868 million since 2007 for various tools it sells the retail chain. He also noted that his company has paid its bills on time.

The problem is that while Sears may be able to force vendors to honor existing contracts, the reasonable fear that the chain at some point won't pay its bills means this probably won't be an isolated incident. Lampert has basically been publicly pleading for vendors to support his company, and that support is clearly wavering.

What happens next?

If Sears could report some concrete evidence of an imminent turnaround, vendors might be placated. The problem is that even though Lampert remains optimistic, data does not back him up.

It's reasonable for vendors to be wary and for some to even decide Sears is not worth the risk. If that happens, it means the end for the company, because even if it still has cash available to spend, if nobody will sell it goods, then empty shelves will put it out of business.

That likely won't happen all at once, but even a few vendors refusing to work with the company starts to create holes in the chain's offerings that leave certain shelves bare. In stores that are already somewhat depleted by the chain's attempts to control inventory to manage cash flow, that could create a negative cycle.

If a shopper visits Sears and he or she does not find what he or she was looking for, then not only is no purchase made, there's also no reason to come back. That's a cycle the company has to stop if it has any hopes of surviving.

Daniel Kline has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.