by
Eric Shaw In the midst of the
second year of the worst recession since the 1930s, business
owners are looking for practical answers for how to survive
through what is really driving the slowness of the economy
(in addition to the credit crisis): a continuing loss of
customers and sales. Naturally, the owners of struggling
companies want to keep trust alive with both their vendors
and their lenders and avoid a worst-case scenario, that of
being forced into bankruptcy and losing their business
altogether. This is no fleeting concern as bankruptcy rates
continue to rise throughout the nation; according to the
American Bankruptcy Institute, business bankruptcies in 2008
were up 54 percent compared to 2007. Surviving the
Perfect Storm Let's paint a
picture familiar to many of late: Your largest customers are
having difficulty paying you on time because they too feel
the credit and collection crunch, so they ask to move from
Net 30 to Net 90 terms. You, in turn, realize that if you
extend those terms, and if your customers pay even one day
late, there is an excellent chance your bank won't lend you
the funds you need to operate, because most lenders don't
like to extend credit against receivables older than 90
days. Yet if you do allow
your biggest customers to pay slower, you in effect become
their lender, but without the benefit of collecting interest
on the loan! Furthermore, they do not have to borrow money
from their bank to pay you for a period of 90 days, but you
still have to borrow against those receivables, and you have
to pay interest to your lender in order to be able to
manufacture or buy goods and pay your overhead. What happens if you
say "no" and don't extend the terms? Your customers could
walk away and take their business elsewhere, and often will.
And if one of those customers is a substantial portion of
your sales, let's say 70 percent? You run the risk of
suddenly operating at a loss and pushing your company into
insolvency. So what is the
answer to what is essentially the perfect financial storm,
created by the current economic downturn? There is no one
ideal answer, but there are strategies you as a business
owner can put into effect that can sustain you for several
months until you can implement whatever additional measures
are necessary to keep your business solvent. In this Economy,
Everybody's Hurting What you first
should know is that right now all types of companies are
struggling to pay their vendors. In fact, it's likely your
vendors are feeling the pinch just as badly as you are. If
you, as one of their customers, do not pay them, then they
in turn cannot pay their suppliers. Just follow the chain,
link by link. Yet, as a credit
consultant, I have discovered that even in this economy most
vendors are willing to work with their customers. Not many
vendors want to be the bad guy and put your company out of
business. They are by-and-large willing to work with you.
The good news is
that you can make your vendors your lenders, just as your
biggest customer wanted to do with you, as discussed above.
But you can do it by creating a win-win situation for all
parties involved. You don't want to hurt your vendors, just
like they don't want to put you out of business. In other
words, you can ease the financial burden of paying daily,
weekly and monthly bills, and do so gracefully and with
honor. Making Your Word
Your Bond It's important to
start by working with the collectors or credit managers who
represent your vendors to create a situation in which your
vendors know you will keep your word. If you have a large
amount in the 90-day column and you're having difficulty
paying it, you don't need to ask for new credit terms, but
you do need to ask the vendor to accept a small payment in
lieu of the amount you would normally pay if you were
staying current. I always suggest
that businesses agree to pay a set amount weekly, no matter
how small. If it's an exceptionally small amount, such as
$100 a week, the credit manager may scoff at first, because
at that rate he figures it will take you five years to pay
off your debt. But if presented correctly, you can convince
many credit managers to work with you. And as you keep your
word by paying that set amount on time weekly, you'll regain
that vendor's trust, and you may even be able to continue to
do business together. Once you've
established that you can keep your word by never being late
with those weekly payments, the next step is to tell that
credit manager that you would like to continue to buy from
that company. In order to do that, you agree to give the
company a check equal to the amount of your next order. If
your next order is $5,000, you send a check for $5,000 along
with the order. The next step is to
then ask the credit manager to take that $5,000 and instead
of applying it to the current order, apply it to your oldest
invoices, the ones that are 90 days old or more. What
happens then is almost like magic. If you continue to buy
enough from that company, you can sometimes get current in
as little as 60 days. And if you do get current, you don't
have to make any more $100-a-week payments. Let's say you owe
$15,000 in the 90-day column. By taking that $5,000 and
paying the oldest invoices, suddenly you have $5,000 in the
current column and only $10,000 in the 90-day column. If you
can do that two more times in the next six weeks, you'll
have $15,000 in the current column and the 1-30 day column,
but nothing over 90 days. What looked like
sure disaster has suddenly become a short-term win-win for
everybody involved. And on
the Flip Side… Of course, the flip
side to all of this is that you can also use this technique
as you're collecting from your customers. Just as you
offered to do with your vendors, you can use small dollars
weekly to test a customer's word. In these tough times, a
business might not have the funds to pay down all its bills
at once, but a business owner or manager does have his or
her word. It only takes three
creditors to put you in bankruptcy. But if you know how to
control both your receipts and disbursements, you control
the company, making the services of a collector and credit
manager even more important than that of a turnaround
consultant. If I can control your payables, I can offset
your slow-paying receivables. In other words, New York
Credit can keep your vendors at bay diplomatically and by
doing so keep your company out of a potential bankruptcy,
even in the midst of the worst economy in 70 years.
A
Credit/Collections Philosophy New York Credit has
a philosophy: If you give good credit, collections will
follow. The question is, then, how do you find out if a
company has good credit? In fact, what do you consider good
credit? When it comes to evaluating credit, are all
industries equal? First, it does help
to know what industries aren't doing well in this economy.
Real estate. And then think about what affects the home
market: construction, furniture, mattresses, home goods,
painters. Plus, people are staying home; they aren't flying,
so airlines and other travel-related industries are hurting.
Law firms and accounting firms-in fact, most professional
organizations-are getting paid slower, which means they also
have to borrow against their accounts receivable. (Conversely, what
businesses are still doing well? People want to be
entertained. The cost of going to a wrestling match, a
ballgame or a movie is still affordable.) Of course, it would
be easy to surmise that collection agencies, which typically
work on contingency fees, are getting a ton of work, and
they are. But did you know that they're losing money due to
increased payroll (as more employees are needed to handle
the increased workload) and because they can't collect the
debts? Therefore, it
becomes even more important when making collection calls to
the customers who owe you money to know if there's any
particular thought process that goes into the call. The
answer to that, once again, is: Your word is your bond. If
you can trust and work with your customers (and if your
vendors can trust and work with you), you can make it
through even the most difficult economy. Some other formulas
that are working in this economy: You can change the cycle
by offering higher discounts in a short period of time, such
as taking off 3 percent if the receivable is paid in 15
days. You can also purchase credit insurance for your
accounts receivable to offset your credit risk. But back to my
original question: How do you find out if a company has good
credit in the first place? Is there a way to know how good
or bad somebody's credit really is in business? The best way
is by knowing someone who knows your potential customer.
Therefore, it all comes down to the four questions I teach
the members of my networking groups at All Cities. When you
meet a prospect for the very first time, you ask him or her:
Who is your banker? Who is your lender? Who is your lawyer?
Who is your accountant? (The All Cities
Network is a California-based organization sponsoring a
series of business networking groups that meet month monthly
throughout Southern California. The business and finance arm
of All Cities is comprised of bankers, lenders, attorneys,
accountants, investment bankers, mergers and acquisition
firms and consultants, all related through a similar client
base and through corporate finance: www.allcities.org.)
If any one of the
people who are the answers to the four questions are members
of All Cities, you can pull that person up on the computer
screen, make a phone call, and get a quick answer about the
creditworthiness of your prospective client. And giving good
credit to truly creditworthy customers is always a good bet,
even in a difficult economy. But what exactly
does New York Credit do differently as we check credit for a
company? Instead of asking for the typical three trade
references and a basic business bank account, on a new
credit application New York Credit asks for the company's
lender. If you'd like to know more about why New York Credit
does that, call us at (310) 827-0076.
©
2009 Eric Shaw and Deborah Jackson All Rights Reserved