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.
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.
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.
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.
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.
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.
You could also order a D & B report on them.
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.
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.
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?
"Pressing him too much will cost you the customer"
You don't know what will cost you the customer.
