Helpful Information















Credit and Collections

Every seller must assess the risk of non payment from customers. Usually, customers will pay for goods and services unless there is a dispute or they are experiencing financial difficulty. Consistent collection calls and if necessary attorney letters, collections agency calls and legal action help collect in these instances. If the customer files for bankruptcy, the collection process becomes more difficult and the percentage of receivable collected is usually very small

The most common form of bankruptcy, Chapter 7 involves liquidating company assets and establishing the priority and amount of payments to creditors. Chapter 11 is a reorganization proceeding in which the debtor may continue in business. Unsecured creditors are placed behind secured creditors such as banks as well as employees owed pay and state and Federal governments owed taxes. Vendors receiving payment up to 90 days before a bankruptcy filing may have to repay these "preference payment" funds to the trustee for the benefit of all creditors. It is extremely frustrating to send back payment for a customer who accepted the goods and still has other open payables due to you.

Proactive Creditor Protection:

  1. Payment Terms: Prepayment and letters of credit are the cheapest and most effective way to collect from customers. Of course, you are not technically a creditor if you receive prepayment. Bank guaranteed letters of credit are effective in guaranteeing payment once product or services are provided and payable in the agreed upon time once documents (invoice, packing list, etc.) are presented to the bank. However, customers must have a credit facility set up with their bank to provide the guaranteed letter of credit and are limited on the amount of purchases that they can process under these terms. Obviously, customers want open credit and will negotiate the terms based on their size and leverage and alternative options they have for the product or service that you provide. Short payment terms and small credit limits will minimize potential losses but also limit potential sales growth. Early pay discounts may reduce profits but also bad debt exposure and improve cash flow.
  2. Credit Reports: Various companies such as Dun & Bradstreet offer credit information that may or may not be accurate. Certain information such as legal filings of lawsuits and certified audited financial statements will be accurate. However, un-audited company provided financials and other information may not be accurate. Also, vendor reports of slow payments or payment default may be the result of bad product/service and disputes. While helpful, one must understand the limitations of these reports.
  3. Credit References: References from banks and vendors are useful in determining the credit risk of a new customer. However, only the best references will be provided.
  4. SEC Reports: The U.S. Securities and Exchange Commission provides very useful reports such as financial statements and stock disclosure for public companies. Of course this is not helpful for private companies.
  5. Accounts Receivable Insurance: Protects against non payment but may be difficult to obtain on accounts where needed the most and typically costs up to 2% of the covered balance per year or up to ½ % of annual sales. However, the product/service sold and industry cause the rates to vary dramatically.
  6. Bankruptcy Insurance: Protects against non payment due to bankruptcy but is extremely expensive, costing up to 3% of the covered balance per month. Also, some companies opt to liquidate or sell its assets and close the business – bankruptcy insurance does not cover this situation unless specifically identified in the contract.