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Author: mattyfatbags One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 14985  
Subject: Slow pay customer Date: 12/10/2011 1:23 AM
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Hey,
I bought a business 2.5 years ago. One of the customers is constantly behind on payments and maintains a high balance. They were one of the original customers when our company was established in 1979. They account for about 25% of our annual sales. Our terms are net 45, but I've shipped product 6 months ago that's only been partially paid for. I get small payments periodically, and I've got orders from them for more. It's frustrating, but I'm sufficiently capitalized to manage their account balance. And I can simply slow production when their pace of payments slow.

With that said, I'm concerned about the end game. At some point, the owner will die or retire (probably die). He's about 35 years older than I am, and there's very little chance of his business getting passed on. I'm wondering if there's some insurance I can get against that account balance? Or is there some legal document I could have him sign that would guarantee me getting paid off? (I'm fairly certain he has considerable personal wealth, no matter the state of his business). Just wondering what the options are on that?
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Author: Jeanwa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14553 of 14985
Subject: Re: Slow pay customer Date: 12/10/2011 11:17 AM
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I bought a business 2.5 years ago. One of the customers is constantly behind on payments and maintains a high balance. They were one of the original customers when our company was established in 1979. They account for about 25% of our annual sales. Our terms are net 45, but I've shipped product 6 months ago that's only been partially paid for. I get small payments periodically, and I've got orders from them for more. It's frustrating, but I'm sufficiently capitalized to manage their account balance. And I can simply slow production when their pace of payments slow.

Has he been consistantly slow to pay or have the terms increase. For example, did he used to pay in 60 days, but now it's 90 or 120 days?

Has the outstanding balance increased?

If either of the above I would call and ask if there was a way for him to get more inline with your terms.

Does he pay the bills, or does one of his employees? We had a customer that the bookkeeper was withholding payment unknown to the owner. When we asked about the delay, he found she had been using the business funds as hers.

Our vendors are tightening their terms and collections. For some folks that means they have to pay them before they pay others. So it could be that his other vendors are insisting on 30 days and you are being put behind them in payment.

Are you charging finance charges on the unpaid balance after 45 days? That's pretty good terms, btw. We don't have any over 30 and some are net 10. Most of them charge 1.5% on the unpaid balance.

We have a couple of customers we have to call for payment. Crazy I know, but that's life. As soon as we call they bring in payment.

How easy would it be for him to find another supplier?

With him being 25% of your sales that's a chunk you certainly don't want to loose. Have you asked him to get the payments more in line with the terms?

With that said, I'm concerned about the end game. At some point, the owner will die or retire (probably die). He's about 35 years older than I am, and there's very little chance of his business getting passed on. I'm wondering if there's some insurance I can get against that account balance? Or is there some legal document I could have him sign that would guarantee me getting paid off? (I'm fairly certain he has considerable personal wealth, no matter the state of his business). Just wondering what the options are on that?

Some of our vendors have a personal guarentee with their credit application, mostly because we are a corporation. To make a claim against the estate, I think there is a time limit...so you would have to know when he passed away. Are there months when you receive no payment?

A friend has a business with a slow pay customer. He finally called him and found out he had passed away. No one notified him, even though he sent statements every month. Since the estate was settled he had no recourse.

I wouldn't be too sure of the personal wealth thing. Looks can be deceiving.

You could do a new credit application with a personal guarentee. You could say you are updating all of your customer files, which wouldn't be a bad idea.

Jean

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Author: mattyfatbags One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14554 of 14985
Subject: Re: Slow pay customer Date: 12/10/2011 3:15 PM
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Jean,
Thanks for the detailed response. To answer your first set of questions: I do my own books, so there's nothing shady going on. I speak mostly to their secretary, but a few times a year I talk to the owner - and it's invariably about me getting paid (if I'm calling), or getting more product (if he's calling). As for payment terms, they pretty much ignore our terms and simply pay according to their cash flow. Imposing finance charges is probably a good idea, but one that I haven't implemented yet.

I like the personal guarantee option in conjunction with a credit application. While it's true that I can't be sure of his personal financial situation, I've got a high degree of confidence that he'd loaded. Also, I wonder if I could add in finance charge terms to the credit application?

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Author: Jeanwa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14555 of 14985
Subject: Re: Slow pay customer Date: 12/10/2011 6:06 PM
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I like the personal guarantee option in conjunction with a credit application. While it's true that I can't be sure of his personal financial situation, I've got a high degree of confidence that he'd loaded. Also, I wonder if I could add in finance charge terms to the credit application?
=============================

Sure you can.

Here's a credit app with a personal guarentee and terms.

http://www.marcone.com/documents/mcn-us-ca-en.pdf

When we made ours up we used ones from other companies and made our own in Word. We didn't do two columns like this one.

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Author: mattyfatbags One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14557 of 14985
Subject: Re: Slow pay customer Date: 12/10/2011 8:13 PM
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That's perfect! Some minor modifications and I'm sending that off.

Thanks.

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Author: Jeanwa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14558 of 14985
Subject: Re: Slow pay customer Date: 12/10/2011 8:35 PM
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Great.

I will say that we have some customers that we don't charge finance charges. Like the ones I have to call to get them to pay. That's just the way they are, we know them personally.

Maybe more frequent calls for payment would help. I know it's a hassle and you shouldn't have to do it, but whatever works. Maybe it's the squeaky wheel that gets the grease. The vendors calling and asking for payment get paid and your bill is left to slide.

FWIW, one of our most wealthy customers filed for bankruptcy. Just the business filed, not him. Turns out he was taking all the money out of the business and not paying the suppliers. He didn't really loose, except respect from those he left hanging. It didn't seem to bother him though.

He started a new business a few weeks later. He came in to buy something from us and wanted to charge it. I said no since he had filed bankruptcy. His comment was that was a different business....like he wasn't in charge. Unbelievable!

Jean

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Author: SeattlePioneer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14559 of 14985
Subject: Re: Slow pay customer Date: 12/10/2011 9:29 PM
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All too common of a problem.


Is the business a sole proprietorship or a corporation? If it's a proprietorship you could file a claim if the owner dies and his estate is probated.

But it sounds like he's sucking you in for ever larger balances. That is likely to end badly. Either he will quit paying you and close his business or you will wind up out of business because he isn't paying.

I'd think real seriously about requiring him to start paying more than he is buying from you each month. Of course, he may just quit buying from you in favor of some other guy willing to extend him credit.

Figure that he should pay off his current purchases plus 1/6 of the past due amounts each month.


I would expect you would NOT be paid if he goes out of business. You might get lucky, but I wouldn't plan on it.


And what about the rest of your accounts receivables? You need to take care to avoid repeating this problem.

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Author: mattyfatbags One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14561 of 14985
Subject: Re: Slow pay customer Date: 12/11/2011 9:48 PM
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Seattle,
I've thought through those issues. The balance has varied but has remained roughly the same since I bought the business. I think I'm probably better off maintaining this relationship as is for another 5 years and then losing my outstanding balance versus getting the current balance paid off and not doing anymore work for him.

With that said, I'd like to get some assurance that the outstanding balance will be paid off. If his signature on a credit application with a personal guarantee is the best I can do, then I'll give that a try.

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Author: Jeanwa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14562 of 14985
Subject: Re: Slow pay customer Date: 12/11/2011 10:55 PM
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With that said, I'd like to get some assurance that the outstanding balance will be paid off. If his signature on a credit application with a personal guarantee is the best I can do, then I'll give that a try.
======================

I would make sure the new application was sent with a cover letter saying you were updating your files. Which is a good idea anyway. Make sure it doesn't look like it is pointed just at that particular customer.

You might, also, consider increasing your prices for this customer a bit to compensate you for the slow pay.

Also, try and work the balance down, similar to what SP suggested. At 25% of sales you certainly don't want to loose him as long as he is paying, IMHO.

Jean

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Author: SeattlePioneer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14563 of 14985
Subject: Re: Slow pay customer Date: 12/12/2011 11:01 AM
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<<With that said, I'd like to get some assurance that the outstanding balance will be paid off. If his signature on a credit application with a personal guarantee is the best I can do, then I'll give that a try. >>



And if he declines to provide that?



Seattle Pioneer

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Author: desertdaveataol Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14564 of 14985
Subject: Re: Slow pay customer Date: 12/13/2011 1:02 PM
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<<With that said, I'd like to get some assurance that the outstanding balance will be paid off. If his signature on a credit application with a personal guarantee is the best I can do, then I'll give that a try. >>

And if he declines to provide that?


A good point which gets us back to the basics of business i.e. "Never let your company depend too much on any one other company or supplier."

My solution would be to bust your butt getting NEW business from others so that you're not so dependent on his business.

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Author: SeattlePioneer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14699 of 14985
Subject: Re: Slow pay customer Date: 11/24/2012 12:32 AM
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<< After thirty days, all account balanced older than 45 days will be charged interest at 10% per month. >>


Unless this was part of the sales contract at the time, you can't unilaterally and arbitrarily start charging interest.


It might be a good practice to establish some policy like that with them now though, with some kind of provision that will start getting the bad debts paid on a reasonable basis.

Of course, they might refuse to agree to a change in terms.



Seattle Pioneer

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Author: MrMoneyMentor Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14709 of 14985
Subject: Re: Slow pay customer Date: 1/9/2013 2:24 AM
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I have had this happen a few times in various types of business entities. I always get a note that I can record which will help you if there is a sudden and unforeseen problem. If you can manage it, and the customer owns any property, collateralize the note and you will have added protection.

Good luck,

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