Risks & Remedies with Slow Paying Customers

Making sure your customers pay you is paramount in today’s economy.  The key is to stay on top of your collections so none of the risks occur and you don’t spend valuable time implementing remedies.

The inherent risks in not staying on top of aging accounts receivable include:

1. Loss of cash you were counting on to pay your vendors & employees.
2. In the event of the bankruptcy of your customer, being an unsecured creditor.
3. Loss of the product you shipped in the event it is seized by the customer’s secured creditors.
4. In the case of a service business, where a retainer or deposit was not collected, it’s the hours already worked.

The warning signs a customer is in financial distress:

1. The customer strays from their previous payment pattern, i.e. they used to pay in 30-35 days and now it’s closer to 50 days.
2. The customer is ordering smaller quantities or puts a consulting project on hold.
3. Industry intelligence suggests the customer is having difficulty.
4. The customer is not returning calls from your sales people or bookkeeper.
5. The customer avoids you in social situations.

Measures you can take to protect yourself include:

1. Be constantly vigilant. As soon as a customer slows on a payment be in contact with them.
2. Insist on payment within customary terms.
3. Understand how significant your product or services are to the customer’s operations.  This may give you leverage.
4. Find out how other suppliers are faring with this customer on getting paid.
5. Ship COD.
6. Ship in smaller lots and keep invoices under $5,000.
7. Request the customer pay early and frequently.
8. Run credit checks on all customers periodically. (This should be done regardless of economic conditions).
9. Request current financial statements.
10. Use a letter of credit or other guaranty of payment for large orders.  If a customer is reluctant to personally guarantee a payment you should be even more reluctant to ship or deliver the service.
11. Take a security interest and file UCC statements.  At this point get your attorney involved.
12. If you agree to take a discounted payment, make sure you get a signed agreement granting you claw-back rights in the event the customer files for bankruptcy.  The claw-back rights allow you to recover the discount.

I can’t stress it enough the increased need for vigilance with your accounts receivable.  Many of these practices are recommended as standard operating procedures for good or bad economic times.

My thanks to Lauren Jennings, Esq. of Posternak Blankstein & Lund, LLP for her recent presentation “Strategies for Dealing With Customers…”.