Now is the time to be extra vigilant and to carefully watch over the creditworthiness of your customers. Assume that all of your customers are in, or soon will be in, financial distress. If they have not called you yet to seek relief, they probably will do so very soon. It is understandable. Almost all companies are partially or fully shut down. And, the ones that are still fully (or close to fully) operational, have their own customers stringing out payment.
Before you extend more credit or agree to term out existing debt, certain questions should be asked in order to properly evaluate your risk. You do not want to be the vendor that provides more collateral for a customer’s bank lender. You do not want to extend credit only to find yourself participating in a bankruptcy or workout at a later date. And, if you already have extended credit, you do not want to be treated inferior to other creditors. So, ask these questions and do not be afraid to probe deeply. If you cannot get answers, there is a reason! It is OK to say that the time is not right for you to give credit if you are not receiving satisfactory answers. It is always a good idea for your customer to know that you will not be taken advantage of.
- Are you current with your rent?
- How many months are you in arrears?
- Have you sought relief from your landlord?
- If so, what relief did you seek and what was the landlord’s response?
- What percentage of your payables are over 60 days old? Over 90 days old?
- Have you sought to term out or discount any accounts payable from your vendors?
- Have any vendors sent demand letters or filed legal actions?
- Have you asked for relief from your bank?
- What relief have you requested from your bank?
- What has been the response of your bank?
- Are you in default to your bank?
- If you have an ABL (asset-based lending) facility, have advance rates been reduced?
- Are you in breach of any loan covenants?
- Have you signed a forbearance agreement with your bank? Have you been asked to do so?
- Have you been asked to sign a pre-negotiation agreement with your bank?
- Has the bank asked you for additional collateral?
- Are any of your customers seeking to return goods to you?
- Have any of your customers sought retroactive discounts on previously purchased goods?
- Have you agreed to purchase on consignment from any of your vendors in the preceding 60 days?
- Have you given a security interest to any vendors in the preceding 60 days?
- Have you asked any vendors to hold up deliveries in the preceding 60 days?
- Have you engaged an attorney or financial advisor to assist you in dealing with the current economic situation?
- How do your current inventory levels compare year-over-year (YOY)?
- How does your current aggregate A/R compare YOY?
- Have customers been cancelling purchase orders? What is the aggregate dollar amount of dollars that have been cancelled in the preceding 60 days?
- Have customers asked to hold back shipments on pending orders?
- What expenses and costs have you eliminated recently? Aggregate annual dollar amount?
- How many employees have been furloughed, terminated or laid off recently?
- By what aggregate dollar amount has executive compensation been reduced? By what percentage amount has executive compensation been reduced?
- Have you applied for funds under the Federal government CARES Act program? If so, how much did you apply for and have you received a response?
Reprinted with permission from the April 30, 2020, issue of eNews. © 2020 National Association of Credit Management. All Rights Reserved. Further duplication without permission is prohibited.
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