Coronavirus Collections: Getting Paid in a Declining Market
Updated: Aug 20
With business slowing down due to coronavirus fears and declining markets, some customers will inevitably begin paying more slowly. Now is the time to implement strategies that will help your business get paid and protect your business.
A Google search will give you a lot of advice about what to do before doing business with a prospective customer, but offers less advice about how to get paid after doing business with a financially insecure customer. Here are a few strategies that may help your business protect itself:
Review contracts and follow nonpayment and notice provisions. Review contracts of past due customers to ensure you understand your business’s obligations to provide notice and what your business needs to do if customers fail to make timely payments. Then, your business should promptly provide all notices related to nonpayment and stay on top of meeting all its obligations under the contract.
Offer incentives to pay. Depending on your business strategy and industry, you may consider offering incentives, such as a discount, to customers that pay on time or get current on their account. Make sure any incentives you want to offer are legal and compliant with applicable laws and regulations.
Identify customer assets. It may be helpful to identify your customer’s assets. This strategy will require you to research the customer, locate their assets, identify their streams of revenue, and identify their stakeholders. When undertaking this, it may be more effective and economical to hire an asset search company. Companies like Forward Risk* (https://www.forwardrisk.com/) can usually generate a report with this information more quickly, more thoroughly, and more economically than utilizing your business’s staff. In addition, hiring an asset search company can help you make sure you conduct any diligence in a compliant manner. Knowing what assets your customer has can help with the other strategies mentioned below and provide insight about the collectibility of a judgment if your business takes legal action against a customer for nonpayment. It can also help your business conduct a cost-benefit analysis of whether chasing a particular customer is even worth the effort.
Alternative payment structures & posting security. Offer delayed payment schedules or other alternative payment structures in exchange for customers posting security. For example, offer to spread out or delay payments in exchange for (i) the customer agreeing to a promissory note and personal guaranty or (ii) committing collateral as security for the customer’s payment obligations. In exchange for an alternative payment structure, you may also request that a customer open a line of credit that can be drawn on to meet their payment obligations in the event they fail to pay.
Adequate assurances. What constitutes an adequate assurance of payment will vary widely depending on the transaction, industry, and other innumerable factors. However, even a simple written acknowledgement from the customer that it is obligated to make the outstanding payments and does not dispute its obligations can be helpful in subsequent collection efforts.
Reclaiming delivered goods. In some industries, sellers of goods may be able to reclaim goods provided to a customer on credit if the seller discovers the customer is insolvent. This strategy can be complex and retaining legal counsel is certainly advisable. Adding to the complexity is that a right to reclaim goods is highly time-sensitive and quick action is required.
Reducing or terminating leases. If your business leases equipment and a customer is behind on payments, you may want to reduce the amount of equipment leased or terminate the lease altogether. Obviously, review your lease agreement to ensure you are entitled to do so, and, if not, talk with your customer about modifying the terms of the lease arrangement. Terminating a lease early for a past due customer can reduce your business’s exposure.
Factoring. Factoring your A/R may be an option depending on your industry and overall business strategy. However, beware that factoring is not allowed in some industries and circumstances.
It also bears reemphasizing the obvious -- do a cost-benefit analysis of the resources it will take your business to chase A/R against the value of the account and customer relationship. If the A/R is worth pursuing and the amount or customer is significant, you should consider getting an attorney involved. Even if the attorney only provides advice in the background, engaging an attorney at an early stage can help secure payment and can best-position your business if the customer files for bankruptcy protection.
Importantly, when a customer pays you, make sure your customer is paying you from their own accounts and, preferably, in the same manner and from the same account that they previously paid. Sometimes a struggling business will get its bills paid by another person or entity (e.g., an affiliate company). If that happens and the customer ultimately files for bankruptcy, your business may get sued for accepting fraudulent transfers.
Declining markets can be worrisome, especially when linked to a pandemic, and these circumstances can certainly impact your business. But being proactive in managing your A/R can reduce the amount and average age of A/R and protect your business if collection actions are necessary or bankruptcy proceedings are initiated.
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* One of the owners of Forward Risk is a former law school classmate of the author.
Disclaimer: This post is for general information purposes only and is not intended to be and should not be taken as legal advice.