Succeeding in Your Business - Column by Cliff Ennico

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Becoming a "Banker" for Your Better Clients

Cliff Ennico

"My family and I run a trucking company that services mostly customers in the construction industry. Obviously, a lot of our clients are struggling in the current economy and are having difficulty paying our bills. Most of these folks are extremely good people, and we know they will turn around and start becoming prompt payers again once the economy improves. We want to collect our overdue bills as much as possible, since we need the cash flow to survive, but we don't want to be so aggressive with our collection efforts that we turn off our �good' customers for whom this will be just a temporary problem. What's the best way to do that?"

Congratulate yourself on being very, very smart. In a difficult economy, it's very tempting to panic when bills aren't paid on time and pump up your collection efforts in an effort to preserve your cash flow. But sooner or later, the economic situation is bound to change (in fact, some folks think it's already turned the corner). People tend to have long memories about how they were treated when the chips were down -- if you treat them like dirt, they almost certainly will hire someone else as soon as they're financially able to do so (and will not hesitate to tell everyone they know how badly your business treated them). Treat them with flexibility, compassion and understanding, and they will remember that for a long, long time as well, which will cement their loyalty to your business.

First of all, you need to communicate directly and honestly with your slow-paying customers right now. Do not use e-mail for these communications. Get in your customers' faces, by telephone or (better) in person. Let them know how important their business is to you; let them know that -- just like them -- you are struggling in the current economy and need to have predictable cash flows. Most importantly, let them see that there is a human being and a small, family business at the other end of the line.

Let your customers know that, while you can't cut your prices drastically, you can cut them some slack and extend credit to them as long as they are paying you at least something each month. Ask your slow-paying customers how much they can afford to pay you for your services each month. Get a commitment from them to make regular payments each month, even if they are significantly less than what you are owed. That will help you manage your own cash flow and pay your creditors on time.

As for the balance of what these customers owe you each month, since you are agreeing to let them pay this later, same as a bank would, you should get the same documentation that a bank would require when making a business loan. Have your attorney draft a "grid" promissory note, and get your customers to sign it. A "grid" note works very much like a line of credit to your "good" customers. You send out your invoices each month, and the customers pay some (not all) of the invoice amount. You then record the balance due on a "grid" attached to the note (a chart that shows the outstanding balance, when payments were made, accrual of interest, etc.), and the balance accrues interest at a commercial rate, which is currently about 3 percent per annum. All principal and interest will come due in a single installment two or three years from now (hopefully, when the economy is better), but the borrower has the right to prepay all or a portion of the balance "at any time without premium or penalty" as soon as they can afford to do so.

The note is conditioned, however, upon the borrower paying at least a minimum amount of your invoice each month. If the borrower skips a month or pays less than the minimum required, they are in default and you will have the right to "accelerate" the note and seek payment of the full outstanding balance in court.

You should consider having the note secured by a lien (called a "UCC security interest" after the Uniform Commercial Code in effect in just about every state) on the borrower's personal property, and filing a "UCC-1 financing statement" with your state Secretary of State's office putting the world on notice that you have a lien on the borrower's assets. Doing this puts you in the category of a "secured creditor," which will help you a lot if the borrower goes under and files bankruptcy. Secured creditors tend to get at least some of their money back in bankruptcy proceedings, unlike other "unsecured" creditors who just have outstanding invoices.

An attorney will prepare the necessary paperwork for you for about one to two hours of the attorney's time, and you can use this same paperwork over and over again with different borrowers. There will also be a filing fee of about $25 for the UCC-1 financing statement.

Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com.

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Copyright 2009 Creators Syndicate Inc.

This news arrived on: 10/20/2009

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