Helping Our Clients Weather The Storm

Cynthia Umphrey
August 11, 2008 — 1,503 views  
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Even though economic downturns are a normal part of the economic cycle they present significant challenges to all of our business clients.  Here are some thoughts on how you can help your clients weather the storm and engage in practices that make sense even in the best of times.  To me, it is essential for us to be equipped to advise our clients how to:  1) run their businesses to better protect themselves from the harsh effects of defaulting and failing customers and suppliers (Smart Business Tactics); 2) protect their own assets from debts or problems arising from their own businesses (the Corporate Veil); and 3) how to protect their assets from their own creditor problems (Personal Creditor Protection).  This article covers only the first point, as I would like to follow up on the others at a later date.

SECTION 1: Smart Business Tactics.

What practices tend to result in businesses actually getting paid?  Some of this seems obvious, but you may find a surprising number of businesses that are disregarding or not doing a good job at managing these practices.  I do admit that not all of our clients will be in a position to use all of the suggestions for their customers and/or suppliers and the like ("Customers") since this will often depend on the relative bargaining positions.  A client who feels a Customer is a risk, but cannot implement protective procedures needs to be well aware of the risk they are taking on if they move forward with the Customer.  Then you should definitely walk them through the other two sections of these materials!

Check Your Customers - Certainly any Customer who has failed to pay your client, has been a slow pay, has had delivery problems or other such indications of financial or business distress in the past is a credit risk and should be treated as such using the tactics described below in this section. As for new Customers, clients can check with their contacts in the industry as well as get references to find out with whom and how this Customer does business. If you have other clients in the same industry you may also be able to assist with this investigation as can lawyers and other professionals with whom you and your clients work. Obviously, if Customers have failed to make timely payments or payments in general to other business contacts, they are likely to do the same to your client. A physical inspection of the Customer's facility can also be very telling. Although a well maintained, efficient, fully staffed and clean facility is not a guarantee of a solid Customer, a dirty, ill-maintained, understaffed facility is certainly a red flag. Run credit checks, and implement a credit application policy. By utilizing a credit application, your client can verify the credit standing of any major Customer and its owners and ascertain if a personal guarantee would be appropriate, and if appropriate, if it would actually be useful! Additionally, the mere use of a credit application may deter those Customers who frequently default on payments. Just as an aside, a Customer who comes along with little concern about your client's prices, terms, quality control, etc. should be viewed with caution since these are often indications they do not intend to pay. Another sign of potential problems is a Customer who is constantly changing its customers, suppliers, advisors, etc.

Collect In Advance - For Customers who may be a problem, or for very large contracts that could make or break a client, collecting part of any purchase price or fee up front is a smart move. Also, where appropriate your client should not deliver the final product until payment has been arranged. Leverage is always key in any form of negotiations and if your client waits to seek full payment until after he/she has fully performed, then he/she is in the weakest position. In certain industries liens or security agreements concerning products can also be used to increase the likelihood of payment.

Have Clear Payment Policies - Businesses should always make sure all payment terms and policies are clearly written, given up front and signed by the Customer to avoid disputes. You should review your client's standard form contracts to ensure these are included as well as to ensure their collections procedures, termination clauses, attorney fees and costs provisions and the like are legally binding and in the client's favor.
Enforce Those Clear Policies - It is never enough to have clear payment policies. They need to be enforced. If you give an inch, they may take a mile. When a Customer is late on a payment, advise your client to contact the Customer immediately and work out some form of payment plan. If your client delays in contacting and enforcing payments, his/her Customers may take that as an acceptance of late payments and your client may fall in priority.

Incentivize Your Right To Payment - Giving incentives to collect what is rightfully yours may not seem like a logical approach. However, by offering a slight reduction for early payments, your client might be able to collect full amounts in a timely manner. Most Customers like to save money when they can, and if they have an opportunity to save, they may choose to pay your client in full before paying their other creditors.
Paper Or Plastic? - If not already in use, your client may wish to accept credit/debit cards. With today's economy of credit, this can shift the non-payment liabilities onto the credit card companies for a service fee. Your client can then take deposits, or even run cards for the full amount owed immediately upon performance.

Call For Backup - When debts owed become sizable, call a collection agency. While a collection agency will charge a fee, which can be sizeable, it may be the quickest and more efficient way for your client to receive at least some of the payments. Additionally, when your client starts playing the game seriously, Customers may be less likely to ignore the debt they owe.

Credit Insurance - Credit Insurance is insurance for non-payment of receivables. Credit insurance may be especially helpful if your client has only a few large customers, such that non-payment by one of them could take the client down.

Watch Market Trends - Hindsight is 20/20, but foresight is more valuable. It is not easy, but if your client watches market trends, they can glean valuable advice. If a client sees, for example, that gas prices are skyrocketing and considers that this may have a negative impact on a given sector (or sectors of the economy) the client will be better able to identify whether its Customers may be in an industry soon to be distressed and act accordingly. This is also great for their own personal business planning.

Cynthia Umphrey

Kemp Klein Law Firm

Cynthia Umphrey helps families and business owners make significant personal and professional life decisions. Ms. Umphrey calls upon over 10 years of experience in estate planning, probate administration, business structuring and business exit planning to guide you though life's most important choices.