Dealing With Customers in Distress Bankruptcy happens. In 2000, more than 37,800 businesses (and more than a million persons) filed for bankruptcy in federal court, according to the Department of Justice. Consider yourself lucky if none of your customers were among those filers. Being a creditor of an insolvent company means you’ll probably collect little or none of what it owes you, which could lead to cash-flow problems of your own -- or worse. Fortunately, a company rarely goes belly up without some sort of warning (see “Warning Signs of Financial Trouble” on page 5). If you are alert to those signs and deal with customers in distress before they file for bankruptcy, you’ll have a much better chance of collecting what they owe you. The Amicable Solution If you suspect a customer is in danger of becoming insolvent, your course of action depends on your business relationship with the customer. When you’re on cordial terms with a customer and you wish to preserve a profitable, long-term relationship, a frank discussion might work better than legal action. If a customer is willing to discuss the situation and acknowledges a financial problem, ask whether it appears to be minor or major, temporary or long-term. Don’t hesitate to request evidence that the customer will be able to pay you. Sometimes, you may be able to extend more liberal credit terms to help the customer out of a short-term jam. This approach can pay off big-time if it results in retaining a loyal customer. A More Formal Approach If your relationship with a customer is less than cordial, or you believe its turnaround prospects are poor, take a more formal, less-forgiving approach. Establish a main objective of collecting your current receivables, avoiding future losses and reclaiming goods you have already shipped. Under most state laws as well as the Uniform Commercial Code, you may demand assurances that a customer can and will pay your invoices when you have reasonable concern that a customer won’t be able to do so. Assurance may include financial statements showing the customer’s ability to pay its bills as they come due, for example, or an escrow account against the amount owed. If a customer refuses to provide assurance within a reasonable time -- or the evidence of its ability to pay is inadequate -- you may be able to: o Pursue a breach-of-contract action, o Cancel all future deliveries, and o Stop shipments in transit or reclaim goods already delivered. But consult your attorney before stopping shipments in transit. Improperly suspending shipments could expose you to breach of contract. And when trying to reclaim goods already in customers’ possession, you must act before they resell or convert the goods to finished products. The legal requirements for reclaiming goods are stringent. Within 10 days of a customer’s receipt of the goods, you must send a written reclamation demand for immediate payment for -- or return of -- the goods. If that fails, you’ll probably have to: 1. File suit to recover the goods, and 2. Seek a restraining order to prevent the customer from reselling or disposing of the goods while your suit is pending. These options are available to you only until the debtor files for bankruptcy. Reclamation may still be possible, but different rules apply under the Bankruptcy Code. Minimize Losses When a good customer approaches insolvency, preserving the relationship isn’t always possible. If that is the case, you must act quickly -- but not hastily -- to fully exercise your legal rights as a creditor. Consult with your attorney to make sure you comply with your state’s law. If a customer files for bankruptcy protection, contact your attorney as soon as possible to minimize loss. Warning Signs of Financial Trouble You can learn a lot about a publicly held company’s fiscal fitness by scrutinizing its financial statements (especially cash flow), earnings reports and other public filings. But what about a closely held company -- how can you tell if it’s on the brink of insolvency? Here are some of the most important warning signals: o The most obvious: slower payments, partial payments or requests for more liberal payment terms, o Managers, executives or those responsible for payables stop returning your calls, o An obsolete or stale product line or apparent quality-control problems, o Cutback of regular advertising or marketing campaigns, o Unexpected layoffs or resignation of the chief financial officer, accountant or directors, o A catastrophic event -- such as a strike or uninsured fire, o Premises in disrepair, o Sudden changes in the company’s market or local economy, and o An inexperienced management team with weak financial skills. If a company exhibits even a few of these signs, inquire further into its ability to pay its debts. Contact | Legal Disclaimer