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Customers with financial woesTimothy S. Crisp
You want to sell products to your customers, but you also like to get paid for them. Your promising or good business relationship with a new or longstanding customer is souring. Your customer's receivables are in arrears, and you're worried about manufacturing or shipping more goods to this customer. You want to retain and build the business relationship if the customer's situation improves, but you worry that you may need to collect what you can now and terminate the relationship before the customer's situation worsens, and in any event before other creditors pick over your customer's carcass. What to do? Handling a financially challenged customer is more art than science. It requires knowledge of your options, diligence, resolve and nerves of steel. There's rarely an obvious "right" answer, but the following are some tools to help you address payment problems with your business customers. (Special rules apply to individuals, consumers and agricultural customers, and they are beyond the scope of this article.) Get and update information on your customer What you don't know can, and probably will, hurt you. Fortunately, useful information is usually easy to come by. Current information about your customer could help you determine how dire your customer's situation is or is likely to become. First, ask your customer to periodically update its credit application. Ask for the most recent annual and interim financial statements and projections. Read them carefully, and ask probing questions about what's gone wrong, and how and when (or if) it will turn around. If an answer sounds suspect or exaggerated, trust your instincts. Second, get a credit report and other information about your customer (and, if it's relevant, its customers) from a service such as Hoover's or Dunn & Bradstreet. Yes, it costs a few bucks, but it can be very informative. Check for lien filings with the Wisconsin Department of Financial Institutions (www.wdfi.org) or another state's filing office, if the customer is incorporated or organized there. It's also wise to look for bankruptcy and other court filings and judgments by checking with the relevant court clerk's office or, in some cases, online. Other useful information can be obtained from news reports and public notices in newspapers. Get better payment terms For future shipments, consider requiring cash on delivery (COD), prepayment of all or a portion of the invoice, or accelerated payment terms (e.g., changing net 30 days to net 10 days), which will help you spot problems earlier. If you have already accepted more purchase orders or have a continuing supply agreement, your customer will have to agree to these changes in writing. Get a purchase money security interest in goods sold Ask your customer to sign a security agreement granting you a purchase money security interest (which is a type of lien) in the goods you sell to the customer and proceeds of such goods, and file a UCC (uniform commercial code) financing statement to cover your customer and the goods. A purchase money security interest has priority over most existing liens on the inventory, equipment or software purchased by your customer. Certain businesses can benefit from other statutory liens, such as construction liens and mechanic's liens. Get credit support Ask owners or parent companies and affiliates of your customer to sign a guaranty of payment of your customer's obligations. Make sure you obtain and update financial information on the guarantors. If your customer can obtain it, a better option is a letter of credit from a financial institution. Be proactive about late payments If you are concerned about your customer, follow up with a professional call or in-person visit promptly after a receivable becomes past due. Find out what happened, and get firm commitments as to how and when the bill will be paid. If your contract permits you to do so, consider setting off any amounts you owe the customer against the customer's outstanding receivables. Stop the bleeding and recover your losses Consider stopping any shipments in transit and withholding future shipments. If you have reasonable grounds for insecurity, you can demand in writing that your customer provide adequate assurance that it will duly perform its obligations under the contract, and in the interim you may be able to suspend performance under your contract until you have received such adequate assurances. You may be able to reclaim goods shipped within the preceding 10 days or a longer period in certain circumstances. Finally, you may be able to file a lawsuit seeking damages or for return of the goods (replevin). The cost of filing a lawsuit is usually modest and can often improve your bargaining position. However, the costs of actually litigating a lawsuit through trial can be very expensive and could deplete or eliminate your eventual recovery. Timothy S. Crisp is an attorney at Michael Best & Friedrich practicing in the areas of commercial and corporate transactions. madison.com ©2009 Capital Newspapers. All rights reserved. |
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