In a down economy, you are much more likely to have to deal with a company that isn't in the best financial shape.
If you know that someone you are selling to may be in danger of not making payment, there are some ways to minimize your risk, according to JoEllen Minchak, a partner in the law firm of Calfee, Halter & Griswold in Cleveland. Minchak was a presenter at the Doing Business in Turbulent Markets seminar at the Forum Conference Center March 14 in Cleveland.
- Credit insurance. This is an insurance policy taken on the goods you would ship to the distressed company. "Because of the trends now, this insurance is costly," says Minchak.
- Cash on delivery. "Cash is king, but a distressed company is rarely going to have the cash to pay it," says Minchak.
- Security interest. Take a security interest in the goods being sold or other assets of the buyer. "You have to make sure you file in the right place, and even if you do everything right, you may still find there are lots of creditors in front of you," says Minchak. "You have got to do some diligence."
- Letter of credit. "This is costly for the customer because there is a 2 to 3 percent fee on it," says Minchak. "It's not very popular." The buyer would also need a banking relationship and collateral sufficient to secure the issuing bank.
- Principal guarantee. Obtaining a guarantee from the principals or a parent company to lessen your risk, but again, you may find yourself behind other creditors.
- Factoring. Selling your slow receivables to another party may help your cash flow, but the more troubled the buyer, the more you may have trouble finding a factor to take it -- or take it at a reasonable price, according to Minchak.
"If you've already shipped the goods and then found out the company is insolvent, the seller can reclaim the goods delivered to the buyer," says Minchak. "The seller has 10 days from receipt date to try to get them back, and 20 days in a bankruptcy situation.
"When you suggest using any of these methods of lessening your risk to your sales staff, they'll be hesitant because they're afraid the customer will get mad at them. It's great to keep your sales up, but if you can't collect on it, it's not good for business."