Strategies for dealing with financially troubled customers

Leading economists say it's true, but many in business will have a hard time believing the recent recession ended in June 2009. Managing receivables is challenging in the best of times, and these challenges have been made even more difficult by the prolonged economic doldrums that still affect many businesses. There are, however, several steps your company can take to strengthen its collection efforts.

  • SPOT PROBLEMS EARLY.

    The name of the game here is vigilance and follow-through. Watch for changes in payment patterns, such as partial payments or increasing delays between sending invoices and receiving payments. Stay in constant contact if the customer exceeds credit terms. In addition to speaking with the customer directly, monitor available public and private information by performing online searches, reviewing court dockets (for lawsuits by other creditors), checking real property records and Uniform Commercial Code filings (for judgments, tax claims and new liens) and consulting private sources, such as a credit reporting service and Dun & Bradstreet.

  • WHEN TROUBLE ARISES, ASSESS YOUR BUSINESS LEVERAGE.

    The actions you can take to protect yourself will depend, in part, on your bargaining position. Ask yourself the following questions: Are your goods or services essential to the customer? How easily can others provide those goods or services at competitive quality, price and terms? Would competitors require more onerous credit enhancements or contract terms in today's market? What practical flexibilities does the customer have with senior lenders, owners and other potential sources of cash? What effect would loss of the customer's business have on you in both the short term and the long term?

  • ASSEMBLE INFORMATION FROM THE START.

    You can strengthen your position when trouble arises by implementing a robust credit application process at the beginning of the relationship and by collecting and updating helpful information at regular intervals later. Consider requiring customers to provide and update information on banking and commercial relationships and relevant corporate information (e.g., the identities of affiliated companies, officers, owners, managers, guarantors, top five customers).

    Do you keep copies of the checks that the customer uses for payment so you know which bank or banks hold its funds? Consider asking the customer for periodic financial statements (you may be asked to sign a confidentiality agreement to get them).

    Also, in times of tight cash flow, don't forget your own vendors. Will they give you a discount if you pay on delivery or before your credit terms otherwise would require? Are your inventories in line with your needs?

  • REVIEW YOUR DOCUMENTS.

    The worst time to discover defects in your commercial documents is after you've started the adversarial enforcement process, when such problems could permit other creditors to get paid first or create inefficiencies in the enforcement process. Take the time now to review with counsel and your sales staff the terms of your standard forms for purchase orders, sales confirmations, bills of lading, supply or consignment agreements and other commercial contracts.

    Although it should go without saying, you must also make sure that your account records are complete and accurate. Do you have all of the underlying purchase orders and invoices to support the balance you believe to be due? Have you properly credited the account with all the customer's payments? Has the customer independently confirmed the amount due in a letter or other writing? These are questions your attorney will ask before filing suit on your behalf, so the earlier you review such records the better.

    When payment problems arise with a particular customer, determine your contractual obligation to continue providing goods. Have you signed a requirements contract or a consignment agreement that obligates you to ship? Also, what are your contractual obligations to provide notice of default and an additional period of time within which to pay? Be sure to follow all such notice requirements to the letter, including using a manner of notice that is expressly authorized by the contract (e.g., certified mail or commercial overnight delivery service). Nothing can slow you down in the race to the courthouse like an ineffective notice of default.

  • DECIDE ON YOUR STRATEGY.

    When you see a problem, determine whether your goal is to merely tread water and not increase your exposure with the distressed customer, to decrease your exposure over a specific period or to terminate the relationship and collect the receivable.

Although recovery is rarely a sure thing, consulting early with counsel experienced in enforcing creditor's rights can significantly improve the prospects for payment.

—Bruce L. Waterhouse Jr.
waterhouse@nicola.com