Managing a Late-Paying Customer

      Advice on handling a good customer who has slipped disturbingly far behind on payments on his account. December 1, 2010

Question
We are a panel processing job shop and have a good customer who has been very slow in paying us. The work we do for them is profitable, but they are really struggling in this tough economy. We get checks from them every week and we continue making parts for them, but they are very far behind and owe us a lot of money. If we cut them off, then it essentially puts them out of business, as we do all their manufacturing. We would also get stuck for a lot of money. If one day the economy improves, hopefully they will get caught up, but right now it is a problem. Their delay in paying us has made it hard for us to meet our obligations too. Thankfully we have other customers that pay us right away, but this one customer is a pretty substantial part of our business.

Any ideas that will ensure we don’t get stung, but somehow help keep them in business? The owner of the company has a long time successful business history and is very well respected in the industry. Many of their competitors have folded and given up. I think it is in our best interest long term to help them survive.

Forum Responses
(Business and Management Forum)
From contributor C:
It sounds like you need to have this conversation with your customer. Maybe they can assign certain assets to you (e.g. machinery) as collateral while you essentially finance them. You sound like a reasonable guy, as does your customer - give it a try.



From contributor J:
I agree with contributor C. You need some collateral to back the payment owed you. He does have unencumbered assets, does he not? Time for him to leverage them if he wants to stay in business. If not, he'll show his other cards in short order. Hope it doesn't come to that. I would have this talk sooner than later; if he's into you, he's likely into others as well, others that may have already beaten you to the trough.


From contributor K:
Yeah, talk first. You have to decide if you want to let his debt keep getting larger. You are at risk of losing all he owes you. I would start with the talk and tell him you can not allow the debt to get larger and with each job; he needs to start paying down the debt. If he is not making enough money on his work to pay for what he needs and pay a little extra toward the debt, you need to cut your losses.


From contributor A:
We recently had to make the same decision. We let the increasing debt get a bit out of hand before we tightened up the reins.

While I agree that in the long term it may be in your best interest to keep funding their business interest free, unless you're tacking on past due charges, I can tell you that once we made the decision to stop producing until up to date and with future work payments to be done differently, at least we did not have the material bills piling up and we can sleep at night again.

While no one wants to lose work, especially in this economy, I would rather be slow with no bills piling up, than busy and unable to meet my financial responsibility to my suppliers.

You also need to look at this company. Are they driving BMWs? Do they seem to be living the slow pay lifestyle? Is this the first time this has happened or is it a continual problem? In the end it will come down to whether or not your company has the cash flow to keep them afloat. If your other work starts to slow up, you will not have Peter to rob to pay Paul.



From contributor S:
I had one customer that was into me for almost 70 grand. I kept doing work for them, all the while trying to get money from them, waiting for the right time. A rush job came through. I was working on the job and they kept calling, checking status, telling me how important this job was. Two days before it was to ship, I dropped the bomb - need to bring your account current or no job shipping. At that point I was willing to lose a customer, but it all worked out. I got paid, they got their job shipped. I'm still doing work for them, but now they don't try using me as their bank.


From contributor G:
You are in effect either an investor in his business or his banker. Either get a share of the business or a secured interest in something. First mortgage in the business real property would be first choice, in his home second. Otherwise in whatever he has that is unencumbered. If he has nothing unencumbered with security interests then you had best decide if he is already bankrupt! He may be able to go along for a long time if you will provide him with free materials (on credit), but you are just digging a big hole.

To a point, to be a friend in hard times is okay (and a damned decent thing to do), but at what point will his filing for bankruptcy put you out of business? I strongly agree with contributor A and would apply his reality check: "You also need to look at this company. Are they driving BMWs? Do they seem to be living the slow pay lifestyle? Is this the first time this has happened or is it a continual problem?"

If he passes the belt tightening test, then it is time to take him out to lunch and afterwards level with him. You are willing to help but you are limited in the amount of credit you can extend, so you either need him to get a line of credit from his bank to catch up, or you need a written (legally valid) security interest in assets to protect you from going under as a result of doing him a good deed.

As an alternative to security, in which case you would be called an investor, a controlling share in his business until you are paid back, one honestly and well drafted, might be a solution if you want to get that far into his business (and have the time and expertise), or else a reasonable share of the company stock in return for saving the company is not unfair.



From the original questioner:
The customer does keep pretty much about even. Every time they complete a job they get us a check and every time they start a job and get a down payment they get us a check. They are not living lavish lifestyles either. One of the partners took a full time job in another industry to survive. They don't own much equipment so they would not have many assets to take if they went belly up. Hopefully we will all get through this crappy economy.


From contributor B:
Are the short payments you are getting enough to cover your costs? If you don't get paid the balance owed, will you have a loss? To me this is a big one - if it is a long established customer relationship and you see light at the end of the tunnel, deferring your profit alone isn't the worst thing in the world. If, however, you are going to go broke because you are subsidizing someone else's shop, that just isn't going to work. I will reiterate previous posters - you need to talk to the guy; you seem to like him and care about his business. If the feelings are mutual he should be willing to do whatever it takes to come to a mutually satisfying agreement. How about putting him on a pre-paid only account? If he's taking a large enough deposit on the job he should have the cash to pay you before you start. He seems to be making at least good faith payments, which is a good sign, but if his business is no longer viable you should seriously consider cutting your losses before his company sinks yours.


From the original questioner:
We talk every day. Anytime he has a dime, he gives us a nickel. Anytime he has $5,000 he gives us $3,000. About 1/3 of what he owes us is over 90 days past due. A few years ago he was never late a day in paying us. And at that time they were our most profitable account. They have had to cut back on advertising, but they still keep in front of the public. In our area they are the number one company in their field. When (if) the economy gets better, they will be a very good source of revenue for us. Right now we are keeping them going. But on the other hand, if they crash and burn, we will have a tough time. I think (hope) they realize that they are on life support and we are holding the IV in our hands.


From contributor K:
It's one thing to put your neck on the line for your business, but to float someone else is crazy.


From contributor J:
"The customer does keep pretty much about even"
"About 1/3 of what he owes us is over 90 days past due"

Would it be possible for you to relocate near me and let me "keep pretty much about even and 90 days out"? That would free up a sizeable chunk of cash flow for me. Thanks. Time to keep him current on current projects, i.e. deposit and COD and get a payout on the past due stuff, with a schedule you can both live with.



From contributor R:
There is no sense beating around the bush. He needs you and he will do everything he can to get caught up, but you will have to press. Tell him each new job will be COD plus a percentage of the overdue balance. If you pull what contributor S did and drop a bomb, you might not get anything.


From contributor G:
I do not think there is anything we can do for your dilemma. It is one for your heart and head to solve alone. We have offered every combination of suggestion and your response has been to tell us that:

1. He is a good customer.
2. He keeps current.
3. He gives you 50 to 60 percent of his cash income.
4. You really want to help him out.
5. You think he is trying hard.
6. You think he has a reasonable chance. (I may be reading between the lines here.)

Don't take this wrong, but what else can we say? We cannot tell you it will all work out. We cannot tell you there are no dangers. It seems you are saying he is not getting further in debt to you, so I guess you can look at it as either pressing him into bankruptcy now, or doing it later. If he is not increasing his debt to you, and you seem to have decided that pushing him now is not the thing to do, then what can we say? It seems to have a limited downside and may help the guy out. I don't see any dilemma left, unless you would consider making him sign a security assignment of some kind (mortgage, etc).

You seem to be a good man and it is the right thing to do to help out when you can and the risk is nominal. Be very careful about lending him more and endangering your company.



From contributor M:
I would be up front and honest with him about the potential of him folding at some time in the future. It may be pertinent to negotiate a lean of some kind against his business assets. In the event he does go bust, you won't be stuck in the 7th row watching the home team get taken over by the bank before you see another nickel.


From contributor V:
Very simple - you aren't a banker. They must stay current or they are C.O.D.


From contributor P:
You have gotten some good advice here. It sounds like you've already made the decision to keep him going. That being the case, you need to work out an arrangement that is to both of your interests.

I would suggest 100% payment for new work and a percentage towards the debt with each order. As long as you are not digging deeper, and there is money going towards the debt, this can work out. It sounds like he is making the effort. If you make it clear to him that this will benefit both of you in the long run, he will buy in to the concept. The quicker he is out of debt to you, the quicker he can be out of debt to others and become more profitable. You should come first because you are their main supplier.

Be honest with him and tell him that as time goes on, you are getting more concerned, and that you want to work with him, but that with his current debt, you cannot afford to float future business, as it is not sustainable for you (making you late with your suppliers) and new business must be paid 100% so as not to make the debt situation worse.

Lay the cards on the table. Until you do, you don't know where you truly stand. If you start seeing new business from him dropping after this, that will tell you all you need to know.

The economy affects everyone. You are working with him by giving him interest free loans, but if it affects your business being able to pay bills, it is unreasonable to continue under the current arrangement, especially if he is your larger customer.
You don't mention how much money he owes you - four figures vs. five figures vs. annual revenue from his company paints a much clearer picture and might alter the responses.

You need to start looking now at how to replace the revenue from his company with work from other sources, not wait until he goes under to start looking, since he is one of your larger accounts.



From contributor V:
If they are a solvent company, they can get a bank line of credit from a bank, not from you. In more than thirty years in business I have been there, done that. The only time I lost money was when I let it ride and the customer went bankrupt. I probably lost two customers because I required them to stay current. I am still in business. Many of my former customers are not.

You could also order a D & B report on them.



From the original questioner:
If he had the cash to pay for jobs upfront, he would be able to pay for older jobs faster. He owes about 30K with about even amounts current, 30 days old and over 90. I could talk to him about some type of attachment on his equipment and vans. Years ago I did this on another customer per my lawyer’s advice. It was very unpleasant and caused very hard feelings. Yes, I got my money, but made another family miserable over it. Was it worth it? Well, I got my money but destroyed a friendship.

Before last year we were doing over $150,000 a year with them and they were always current. Last year their business was down 50% but ours was only down about 15%. So far this year our business is down about 30%, which makes the situation more difficult. I have been approached by a competitor of his, but told him that he would have to supply all materials and I would charge labor only. I have not heard back from him. Through the grapevine I heard the other company was looking for us to bankroll them too. Not going to happen. Hopefully the economy will improve with both our companies intact.



From contributor P:
20% debt and another 20% on slow pay to one company, who is your major supplier, is not a good position to be in. The situation is a little clearer now.

You are financing both long and short-term debt for this customer. While it is admirable you want to help him out, keep in mind you already are. It is time for him to help you out a little. I commend you for looking at the human/relationship side of this. It is refreshing to a certain extent, but this relationship is skewed all in one direction, and you are on the short end. $150K in gross sales with $60K in debt? I don't know your profit margin, but with that amount it's hard to see how you are making money.

Put it into perspective. What would that relationship mean if he closes his doors owing you $60K? I assume that losing a year's worth of work and profit would damage your relationship with him, yes? Because that's what we are talking about here. Even if your gross profit margin is 40%, you've basically worked for him for a year for free on the hope of getting paid, and if it's not 40%, you are actually paying him out of your company's coffers to do work for him by covering his short and long-term debt.

You need to remove some of the emotion from this and you absolutely have to go 100% on new business. Work out terms for the balance. I can see you're hesitant to collateralize, and understand your reasons why, but are you willing to hope that he doesn't go out of business and lose the $60K you spent the last year building up?

Something to think about. If you do follow through and state that you need 50% down, 50% on delivery for all new business, and a percentage toward the old debt, and he says he can't do it, are you really going to keep letting him get deeper into debt? There's that moral/relationship side to that also.

If he cannot afford to pay you 50% down, 50% on delivery for new business, you are placed in the position of not being able to pay your suppliers, which is not reasonable for anyone to expect. In that scenario, all it takes is one or two of his jobs to go completely sideways and your position can dramatically spiral out of control.

There is only so much you can place your business, your livelihood, your family at risk for someone else's business.

How would $60K in debt/loss to overcome affect you, your business, and your family? If you move forward without making the changes suggested, just realize the risk you are taking, relationship, good intentions or not.

You need to hope for the best (that he pays you), and plan for the worst (that he doesn't) and start putting into place new business to replace him should things go south. At least then you will have profit to keep floating him with.



From contributor U:
"I have been approached by a competitor of his but told him that he would have to supply all materials and I would charge labor only. I have not heard back from him."

I am wondering why you want to require this potential customer to supply his own materials? I prefer to supply my own materials, as I know what quality I want running on my CNC, etc. I don't want the hassles of trying to run junk through my machinery.

If cash flow is an issue with the potential new client, then simply state the terms. For example, 50% down and 50% before delivery, or 75% down and 25% before delivery, or whatever makes sense for you. To me, it also does not make sense not to make a markup on the materials. After all, who will be unloading, moving, handling, and reloading all of that material? The customer? I don't think so. I know, you said you will be charging for labor. Did you include all material handling in the labor including temporary storage (bet that delivery truck won't arrive just 15 minutes before you want to start the job)? And, what if a piece of material gets damaged during handling or processing? Who takes the risk for that?



From contributor H:
I have done this with clients and suppliers have done this for me in the past. Freeze their current past due amounts. Whenever he gives you a check for a new order, he adds 10% to that check and you apply that to his past due. So if he gives you a check for 3000.00, then he gives you 300.00 more. This will not break him and you both can go on with business as usual. It works, and you'll all still be friends and making money when things get better. Or you can be sneaky about it and claim to have to raised your prices 10% and do the same thing without telling him. The first way is better.


From contributor E:
I agree with much of what has been posted here; however, the reality is that 90 days old on invoices is not bad for the state of the economy so long as the hole isn't getting any deeper. Pressing him too much will cost you the customer, as well as moving you significantly down the payment ladder. Make him go somewhere else, and your prospective payments will be used to stay current with the new supplier. What about a lien on his customers? Just in case.


From contributor V:
"90 days old on invoices is not bad for the state of the economy."
Yes, it is. Besides, he wrote "over 90 days."

"Pressing him too much will cost you the customer"
You don't know what will cost you the customer.



From contributor Y:
This reminds me of a conversation I had with a former shop owner who went bankrupt. He had a client like yours. His logic was that the bad client made him go bankrupt. Looked to me like he made himself go bankrupt by using some of the same convoluted logic that you are. This is only going to get worse if you don't face it head on, and your demise will be your own fault. Take a step back and give it a view as if you were on the outside looking in.

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