(Note to production about mug: Brian Davidoff’s Bargain Bankruptcy article was published in the Sept. 14-20, 1998 issue.)
Brian L. Davidoff
Acting in good faith, you provide goods or services to a customer. You submit an invoice. Thirty days pass. You receive no payment.
You send numerous invoices and notices, and you still aren’t paid. You wonder if you will ever receive payment, or if your customer is even capable of paying.
Although business owners carefully manage credit terms and amounts, this scenario happens regularly to many businesses. To prevent it from happening to you, look for potential warning signs that indicate your customer is on shaky financial ground, and be aware of legal options should the outstanding debt continue.
One of the clearest indications of financial distress is that your customer’s payments, which have always arrived on time, begin showing up late. The first time could be an anomaly, but if it happens on a regular basis it could signal trouble. Begin keeping close tabs on whether the customer fulfills his or her commitments in a reasonable time.
When you contact their accounts payable department, listen carefully to get a sense of whether the story you’re told is true. Occasional cash-flow problems are understandable for any business, but the same excuse several months in a row is a cause for concern.
Speak with high-level individuals to get an exact date for a specified payment. If you are in the same area, offer to have a messenger pick up the check to make it more difficult for the customer to further delay payment. If the customer can’t pay the full amount right away, consider negotiating a monthly installment arrangement.
Another red flag is that a key officer or other important manager at your customer’s company resigns, especially if it happens more than once in a short time. They may be leaving the company due to its financial problems.
Pay close attention to the industry involved as well as the overall state of the economy. No company functions in isolation. Be alert to marketplace changes that could impact your customer.
For example, if one of its own customers has gone under, that could cause financial distress. If the customer has fallen behind in technology, product development, or marketing efforts, it may be on shaky ground and, again, you may suffer as a result.
A wealth of data is available about the financial status of a company. Through your bank, you can obtain an updated credit rating on the customer. Or, for a fee of under $15, you can order a credit report from www.creditfyi.com. This is a site provided by Fair Isaac & Co. and Experian, both major sources of credit data.
You can also ask your law firm to search for any judgments or liens. If the customer has numerous judgments against it, that could be a problem. If you file suit, you will be at the end of the line of judgment and lien creditors.
If the customer is free of liens, you may have more leverage if you do sue because you could be first in line to get paid. Also, if the customer is a corporation, a limited partnership or a limited liability company, find out if it is properly registered with the California Secretary of State. If not, it is not allowed to appear in court to defend a lawsuit that you may file. That information will also tell you who their registered agent is for service of process.
If nothing has worked, what are your alternatives? One legal avenue is known as the right of reclamation, which applies to all vendors that supply goods. Under the California Commercial Code, if you have delivered merchandise to a customer that you subsequently learn is in financial distress, you have the right to take back the merchandise within 10 days of delivery. If the customer has misrepresented its financial position, then the 10-day limitation does not apply. If you decide to exercise this right, you should promptly send the customer a letter demanding return of the goods.
If you cannot reclaim the goods, you may need to file a lawsuit. Because the trial usually takes place many months later, a weapon of choice is to file a writ of attachment at the same time as the lawsuit. It will be heard either the next court day (if it is an emergency) or 15 days later, and if successful, the court can order the attachment of all of the customer’s assets (up to the amount of the claim) pending the trial. This ensures that if you are successful at trial, there will be a source of funds from which to get paid.
Armed with this legal firepower, creditors are often able to get prompt payment from the customer.
It may seem like a strange question, but should you continue to extend credit to the customer for additional sales? The answer depends on your relationship with the customer, their importance to your business, and how much risk you are willing to bear. You could change your credit agreement by requiring payment in advance or COD for any future purchases.
Sophisticated advisors to debtors know that most trade creditors are willing to take one “hit” from a customer, provided they can continue to do business.
The bottom line is this: If a customer owes you money, don’t simply roll over and lick your wounds. There are a variety of business tools, including a powerful legal arsenal at your disposal, to help you get your money.
Brian Davidoff is a lawyer with the Century City firm of Rutter, Hobbs & Davidoff Inc. His e-mail address is email@example.com.
Entrepreneur’s Notebook is a regular column contributed by EC2, The Annenberg Incubator Project, a center for multimedia and electronic communications at the University of Southern California. Contact James Klein at (213) 743-1759 with feedback and topic suggestions.