Managing the Credit Crunch

If you believe the media pundits (and we are not sure we always do) a liquidity problem has developed in our economy which has tightened the availability of business credit or priced it out of reach for many businesses.  As a result many businesses may be facing liquidity troubles (read  “poor cash flow”) which could alter payment patterns for goods and services they utilize.  If you are a provider of services or a seller of goods (or a landlord, lender or other creditor) you should pay special attention to the payment patterns of your customers/tenants/clients in the near term.  Here are a few guidelines for dealing with the credit crunch that may be affecting your customers:

  1. Don’t become your customer’s bank.   If you supply goods or services used in your customer’s business, don’t allow your customer to turn around and resell what you have supplied without paying you as agreed.  We have seen cases where wholesalers sell to retailers on trade credit, with the retailer then reselling at a profit and diverting the receipts to pay other bills, not those of the original supplier.  You need to find a way to make sure that when your customer gets paid, you get paid.
  2. Monitor your receivables for pattern changes.   Do this religiously.  If a customer normally pays in 10 to 15 days and suddenly goes to 30 days or more, alarm bells should sound.  Be prepared to discontinue sales to customers who do not pay as agreed.  Some of our most successful clients monitor their receivables daily.  Changes in payment patterns are discovered and addressed early.
  3. Offer early payment discounts.  Encourage your customers and clients to pay early by offering a discount for prompt payment.  In the old days a 2% discount was customary for payment received within 10 days.  Depending upon the industry, as much as 5% is now customary.
  4. Enforce late payment charges.  While the early payment discount is a “carrot” to encourage prompt payment, the late charge is the “stick” to enforce payment.  The possibility that late payment charges might be imposed must be disclosed to customers in advance.  For open account customers this can be done in a letter stating that for all purchases made after a certain date a late payment charge will be imposed on payments not made within terms.
  5. Obtain personal guarantees.   We have said this before, but nothing beats a personal guarantee for keeping corporate and limited liability entity customers honest.  Most banks will not advance credit to small corporations and limited liability entities without a personal guarantee from the individual owners.  Why should you?
  6. Ask for additional security.   Sellers of goods should consider retaining a security interest in the goods they sell through UCC filings against the customer.  A UCC security interest can also be taken in inventory and other personal property.  Collateral mortgages can be taken in real estate to secure business trade debt.  While we recommend that suppliers try not to become the bank for their customers, they should think like a bank when it comes to obtaining security for trade credit.
  7. Don’t forget reclamation.   For suppliers of goods and tangible property the Uniform Commercial Code allows you to retake possession of your goods within 10 days of delivery if you get wind of your customer’s insolvency.  The process for a successful reclamation claim can be tricky and action must be taken quickly.  We can guide you through this if necessary.

A healthy business economy depends upon each individual business being run optimally.  In the near term greater attention will have to be paid to maintaining a healthy cash flow and this means close monitoring of receivable patterns and taking a proactive approach. Let us know if we can help you implement any of these ideas in your business.

– Kevin Palmer

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