By Bridget McCrea
What to do when your distributorship is getting squeezed between a supplier that wants its money and a customer asking for extended payment terms.
It's an age-old problem that many distributors continue to grapple with: the cash crunch that comes into focus when suppliers tighten up their payment terms and customers ask for more time to pay their bills (or, when the latter negotiate extended terms right upfront, when contracts are being awarded). Every business owner—distributor or otherwise—has been there in some shape or form. And while the issue seems to be most prevalent during times of economic distress, it can also rear its ugly head during the good times, when business is brisk and companies take their eye off the accounts receivable (A/R) ball to focus on more pressing matters.
"If my clients didn't have ongoing issues with cash flow related to slow payments, I wouldn't have any business," quips Elliott M. Portman of the Portman Law Group, P.C., in Hauppauge, N.Y. Specializing in creditors' rights laws, he says the issue cuts across "all industries and all walks of life," both business and personal. "People and organizations get cash-crunched and can't pay their vendors, their service providers, and their utilities," says Portman. "That presents a very difficult situation for the business owner who winds up feeling the squeeze when customers don't pay."
That situation becomes especially problematic for electrical distributors who rely on good partnerships with their vendors to keep their own companies in business. In other words, many wind up having to either "cover the spread" or risk souring relations with their own vendors when customers demand longer payment terms or are unwilling to pay their bills on time.
"Every now and again the issue is a legitimate dispute over the goods or services that were provided," Portman points out, "but generally speaking, people as a whole are reluctant to pay their bills. Plain and simple."
Closing the Spigot
It's one thing to know that your firm's A/R is aging to the point of being problematic, but actually doing something about the problem requires a completely different skillset. After all, you wouldn't want to cut off a good, loyal, consistent customer for paying 15 days later than your own invoice due date (with your supplier), right? But at the same time, that customer is putting you in a defensive position by stringing out its payments terms by more than two weeks.
"You may have a long, personal relationship with your debtor's principal or owner," Portman says, "but nothing makes strangers of friends faster than a debt owed." One way to avoid potential problems is by simply using a credit application for all new accounts that include any type of payment terms. "That's an important step if you want to get paid on the back end," says Portman. Within that credit agreement, be sure to stipulate that if the customer doesn't pay, then X, Y, and Z will happen (i.e., the account will be sent to collections, there are penalties for non-payment [spell out clearly what they are], no additional goods or services will be rendered, all future orders will require cash on delivery [COD], etc.).
Portman also tells distributors to ask for and to actually check the references that new customers list on their credit applications. "Most applications require banking information and references, but how many companies check those references? I'm betting it's a pretty small number," says Portman. Don't be afraid to pick up the phone and ask the past vendor questions like: Is this potential customer of mine paying you on time? What's your overall impression of this customer? Have you had any issues or problems with payment during your relationship?
Before doing business with a new electrical contractor, Portman says distributors should ask about the customers' business structure. That's because doing business with—and collecting payment from—a sole proprietor versus a limited liability corporation (LLC) versus a corporation can be very different. "A corporation with no assets can literally fold up and go away," he warns, "whereas an individual owner may be on the hook for the amount due."
Finally, Portman says distributors should always "assume the worst" when dealing with both existing and prospective customers, knowing that when the going gets tough the payment stream could wane exponentially. "I have business owners tell me that they can't have credit applications because it would kill off their businesses," Portman says. "My response to that is if you have people that go away and don't do business with you because of a credit application, then they probably weren't serious about paying you on the backend anyway."
In the second installment of this article series we'll explore the cash gap challenge in more depth and give you specific ways to balance late-paying customers with suppliers that are asking for shorter payment terms.
McCrea is a Florida-based writer who covers business, industrial, and educational topics for a variety of magazines and journals. You can reach her at email@example.com or visit her website at www.expertghostwriter.net.