We have a "slippery" customer who we unfortunately need to keep. We are converting $20K AR to a 10 month payment plan and will be charging them $4-5K monthly for future service over a year. This account conversion to notes has happened once before due to customer cash flow/
securing customer payment
Answers
I think you have two choices, secure the note with whatever they have or can offer. If they can not offer hard assets, another option is to have stockholder/s or owner/s sign a personal guarantee. Although it may be too late (since you already converted to a note) you can also look at their AR/Sales and maybe they can assign you one or two Invoices (with or without a discount). That way, you are "intercepting" cash and also this is another way of distributing risk. As always, one or a combination of these will do.
All are hard to secure, but you have the leverage now and you should use it.
Why do you believe you need to keep them? Do you really want to be an unsecured lender? How much margin do you have in your services?
The answers to these questions are important in making a decision.
By deciding to continue to delivering services you have implicitly or explicitly made the determination that the company is viable and just in a temporary cash flow crunch. I hope you are right.
It is too late to do anything to protect yourself other than cutting your losses. But you have made the decision to continue to deliver.
Personal guarantees are fairly worthless in practice but you could attempt to get one. But most small business people have their wealth tied up in their business. So to get value from a personal guarantee your would have to force the owner into bankruptcy.
You should immediately do a complete review of your credit limit process and make some policies on who gets credit and who doesn't. You also need to do periodic credit reviews of all of your customers. Your policies need to be written down also.
Finallly, you might want to get some expert advice from a collection agency. There are was of negotiating payments. If you don't do collections for a living then you should call in the experts.
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I agree with Scott here. By the time you collect your A/R, you've degraded your profit margin because of cost of money and added expense involved in the collection of the debt.
Companies having that much difficulty are not going to give you a phone call one day telling you "hey we're seriously thinking of filing Chapter 7", you'll get a lawyer letter saying they are in Chapter 7 or 11, in either way your SOL, you'll see maybe pennies on your dollar.
Apart what has been said in the previous post
Your capacity to secure payments will highly depend on how critical is your product to your customer or customer' s customer
In any case my take is that you need to see you can get assigned a revenue stream from one of your customer customer if higher creditworthiness
A lending mentor of mine once said....."If you want to terminate the relationship, send your client to a collection agency."
Collection agencies are your LAST resort. As long as your client is on the table, it is better for everyone. The fact that you have been able to renegotiate is still a good sign. No matter how much you know that they are employing "payment avoidance" strategies.
As others above have mentioned.....cover your ass (additional credit and cost of money, etc). You are right in your concern and want to secure the note. Of course a hard asset support is better but the personal guarantee although further down the totempole is still better than nothing. I highly recommend that along with the note, the source of payment should also be secured. That is why I brought up the option of having their invoices (Revenue) assigned to you. This "guarantees" payment and also (as I have said) distributing the credit risk.
A cost/benefit analysis should be done on this customer. I agree with Scott and Wayne.
Going forward do a credit check for each contract. No matter how long you have worked with a person/company ; no one is ever going to tell you they are having financial difficulties.
Add this phrase or something similar :Should an invoice be sent to a collection agency, the debtor will be liable for any fees charged to collect that debt including
Personal Guarantees are not worthless (except for in Florida) they can only help.
If you had a non recourse agreement with a factor and the invoice was approved then you could guaranteed payment.
As long as the client is proactive in communicating (as opposed to you chasing them) and continuing to make payments. When they stop doing either one, that is time to make one last call / email. If no payment is received by a certain date which you set, then it should go to a collection agency. Each month you wait decreases the probability of getting paid. You may be their bank don't become their charity.
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If you have a client that consistently delinquent to the point of costly you substantial time and money you probably do not want that client anymore.
That said sending a client to a collection agency does not necessarily mean the end of a relationship. It depends in part how the agency handles the claim.
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