April 3, 2020
Lea Pauley Goff
Member, Stoll Keenon Ogden PLLC
“Perhaps . . . the Earth was made round so that we would not see too far down the road.”
— Isak Dinesen, Out of Africa
Many observers of our economy had been predicting a downturn, based on the end of a historic expansion, excess corporate leverage, and other pressures that now seem almost quaint.
However, the economic chaos triggered last month by the current pandemic dwarfs those “normal” pressures, both in in speed and ferocity. Chances are your business will suffer decreased sales in the coming months, so it is more important than ever to collect your accounts receivable for goods already shipped and services already performed.
However, chances are your customers are already requesting accommodations, such as reduced pricing and longer terms for payment. As you field these requests and decide how to respond, there are multiple considerations, as described below.
1. If a customer simply is not paying, don’t wait for them to act. Initiate the conversation about how and when they will pay and how you will do business with them in the meantime. Your receivables will not get better with age. If your customer is robbing Peter to pay Paul, you want to be Paul.
2. Ask yourself if this is a customer you want to keep — i.e. that contributes to your business’s wellbeing — as you may choose not to accommodate the other kind.
3. As you consider whether to work with the customer, think about whether the amounts owed are profit, the result of labor, or hard expenses you will still have to cover.
4. If you choose to work with the customer, document the accommodation, indicating that it is at the customer’s request because of the current pandemic. State what it is, how long it will last, and any limits on it, so that it does not become the “new normal” in a recovery. Will there be volume minimums? Can you refuse to fill an order? Tie the documentation to your existing contracts if you have them, and make sure the related documents are consistent (i.e. purchase orders, order confirmations, bills of lading, invoices).
5. If your customer is likely to file for bankruptcy protection, talk with your counsel about whether you are better off keeping an existing contract or terminating it and proceeding on an order-by-order basis.
6. If you enter an agreement making accommodations for new business going forward, consider what happens to the existing balance. Agree on the payment terms for that. Putting those amounts into a note may make it hard for the customer to dispute quality and other issues later. Getting a release as part of a new deal my help limit later warranty claims on the goods previously shipped or the work already done. Consider what payment assurances you can get in exchange for the accommodation — can you get a guaranty or a letter of credit?
7. Before considering a material accommodation for a major account, you should know whether that will have an adverse impact on your relationship with your lender. Will your action put you out of covenant with your lender (i.e. sometimes no good deed goes unpunished)?
8. Any term or performance changes with your customer may make you more likely to be paid something but may also reduce your defenses to preference or other claw-back claims if the customer ends up in Bankruptcy Court. However, if the customer is slowing or forgoing payment, those defenses may be diminishing anyway.
These considerations should help you make deliberate choices about customer relationships and maintenance of revenue in the challenging days ahead.