The Balance Between Risk Management and Client Relations
As businesses fight through the tough times created by the pandemic and government restrictions that impact their operations, it is imperative to be mindful of the situation your customers face, especially if you extend credit. This extension of credit can be as simple as shipping goods or providing services that are invoiced for payment after that. Offering credit can grow in complexity. All businesses need to be focused on whether they could withstand a default or a series of delayed payments from key customers. If your company identifies customers where such defaults would create serious financial hardship, you must be vigilant and consider whether there are options to better protect your business if you detect financial instability with these clients.
If you know or suspect that a customer is in financial trouble, there are several steps you can take to minimize your risk in doing business with them, while trying to also be a good business partner. Here are some examples:
- You might talk to your customer about obtaining some security for the extension of credit, including a potential purchase money security interest in goods sold. For example, if you are selling machinery or other equipment that will remain identifiable, adding the documentation and proper filings needed to create a security interest will significantly increase your likelihood of obtaining payment or the return of the goods sold.
- Another option is to seek a letter of credit or a guaranty of a principal or parent corporation. If you are selling services or goods that are not readily recoverable once delivered because they are consumed or converted into other products, an irrevocable letter of credit creates a certainty of payment. Perhaps an owner or parent company has significant assets. If so, a guaranty of your customer’s debt will provide additional avenues for collecting what is owed.
- Or, you may require that the invoice be prepaid and that the goods are shipped or services rendered – only after payment is received.
In short, it’s important to maintain open communication regarding finances with your customers. Your business can be understanding and flexible. However, you need to look out for your financial well-being, too, as there are risks associated with being flexible should your customer’s business fail. There are various options available that may allow your business to decrease risk created by doing business with customers suffering financial difficulties. A proactive business that is monitoring their customers and staying on top of their accounts receivable will be more likely to recognize the troubling signs of a client having difficulties and be able to position itself to be better protected against a bankruptcy filing or default by offering solutions.
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The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings, and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. In some cases, the underlying legal information is changing quickly in light of the COVID-19 pandemic. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship. Please contact your legal counsel for advice regarding specific situations.