The current economic conditions are creating challenges for everyone. In these market conditions, it is particularly important to take care when selling goods or providing services to customers on credit.
Understanding your rights and obligations with key customers in business is crucial. Dealing with problem that arises out of the blue is significantly more challenging than if you have considered options in advance. Right now, the speed of change is rapid and the consequences can be severe.
Would you know what to do if one of your key customers defaulted?
A practical framework can be applied to help businesses mitigate against customer defaults. This zeros in on three key areas: planning, monitoring and management.
1 The key to mitigating against loss caused by customer defaulting is proper planning at the commencement of relationship. Remember generous credit equals higher risk. Proper planning requires standard terms of trade for customers.
2 Businesses should have in place effective and enforceable terms of trade. These should be regularly reviewed to ensure that they are in line with any changing legal requirements and they provide maximum protection.
3 For key customers or customers requesting credit outside normal terms, consideration should be given to whether business’ standard trading terms are appropriate or whether additional terms or security should be required.
4 It is equally important to ensure that trading terms are properly executed so that they are enforceable against the right party. For example, retention of title in goods supplied can create priority ahead of bank’s general security. However, this priority will be lost if the terms of trade are not signed by the customer or the interest created by the retention of title clause is not registered on the Personal Property Securities Register within the required timeframe.
5 Monitoring – The old adage of ‘keep your friends close but your enemies closer’ can equally apply to key customers. Too often, the catalyst for the need to restructure relationship is in the form of request for further credit or failure to meet commitment on due date. If this is the case, the most constructive options for restructuring may have already been missed. Proper monitoring of key customers is essential to minimising surprises and planning responses to customer’s default.
6 Effective monitoring requires reliable information. Making assumptions or relying on assertions should be avoided where information can be obtained to determine position. An ability to request relevant information can be included in trading terms and even if it not, can be required as pre-condition to continuing to provide credit.
7 Management – customer defaults require proactive management.
8 The first time you have an opportunity to restructure relationship is usually the best time. If you go along with the status quo instead of proactively managing customer default, it will often cost more money in the long run.
9 What strategy you implement will depend largely on whether you decide to terminate or continue the relationship. decision to extend credit should only be made on the basis of reliable information and clear agreement and timeframe for repayment. An agreement to provide further credit should also come with an improvement in your position, for example, by requiring guarantee or security, or requiring future trading to be on cash upfront basis.
10 Proper management of customer defaults requires urgency and commitment. key factor will be setting and enforcing agreed milestones. Most often the best recoveries are achieved by creditors who act quickly and who strictly enforce agreements and timeframes.
David Levin is associate director, recovery, Deloitte and Michael Bos, is partner, DLA Phillips Fox.
