Working Through Your Key Customer's Financial Difficulties
Bettering Your Position For Payment On The Delinquent Account
By Scott Blakeley
You are a sole-source supplier with a long term contract
with a customer. The supply contract provides for 30 day credit terms.
The customer accounts for a significant percentage of the vendor's
sales, which are on credit. With the downturn in the economy, the customer
loses business, resulting in significant cash flow problems. However,
your research indicates that the customer's financial problems are
temporary, and may remain a significant source of business over the
long term. The customer has problems paying its lender, who has a security
interest in all of the assets, as well as its vendors. Your account
is past due.
You consider alternatives for repayment of the delinquent account,
yet still have the customer remain a significant source of business.
One alternative, the customer solicits your company to invest in it
to continue to operate during the shortterm downturn. Your company
does not want to lose the significant revenue generated by the customer,
but obviously does not want to increase its credit exposure.
Creditor instead of investor: to retain the significant source of business,
the vendor may consider a short term loan to assist the customer's cash flow.
Creditor status gives the vendor priority in the event the customer fails to
repay, as opposed to investing in the customer.
Guarantying some of the customer's debt: the vendor may consider serving as
a guarantor of certain of the customer's debts. The upside is that it may not
require an immediate infusion of cash. However, the risk is that the vendor
may have to pay on the guarantee if the customer fails to pay the guaranteed
debts. The guarantee may calm creditors and allow the customer to continue
to operate. Working with the customer's lender: the customer's lender has a
security interest in all of the customer's assets including accounts receivable,
inventory and cash. The vendor may be able to calm the lender's anxiety with
the customer's financial performance by committing to guarantee certain of
the customer's accounts receivable, or guarantee a floor for the lender's collateral
should it be forced to foreclose on the customer.
Personal and affiliate guarantees to protect the vendor: the vendor may insist
that the owner of the customer (if it is a closely held company) provide a
personal guarantee to the vendor to protect it for its financing. The guaranty
creates a contract of secondary liability. The owner may provide the guarantee
to the vendor given the alternative that the customer's lender may foreclose
on the business. Likewise, the customer may have an affiliate business with
value that may furnish a guarantee to the vendor.
Purchasing the customer: in certain situations, the vendor may determine that
the economics are such that buying the customer may be the most effective way
to maximize the value of the relationship. This is the ultimate equity investment.
The vendor has to be careful with its approach to financially assist the customer.
The vendor cannot misstep with its strategy to reduce its credit exposure but
open the door as a target for litigation from other creditors, including its
Reprinted by permission from The Trade Vendor Quarterly Blakeley & Blakeley
LLP Fall 02