Sunday, July 20, 2014

Making Vendors Your Lenders: Insider Entertainment Tips

by Eric Shaw with Deborah Jackson

In the midst of a sometimes excruciatingly slow economy, business owners are looking for practical answers for how to survive through what is really driving that slowness (in addition to the credit crisis): a continuing loss of customers and sales.

Naturally, the owners of struggling companies want to keep trust alive with both their vendors and their lenders and avoid a worst-case scenario, that of being forced into bankruptcy and losing their business altogether. This is no fleeting concern as California has had the highest number of bankruptcy filings in the nation in the past few years.

Surviving the Perfect Storm

Let's paint a picture familiar to many of late: Your largest customers are having difficulty paying you on time because they too feel the credit and collection crunch, so they ask to move from Net 30 to Net 90 terms. You, in turn, realize that if you extend those terms, and if your customers pay even one day late, there is an excellent chance your bank won't lend you the funds you need to operate, because most lenders don't like to extend credit against receivables older than 90 days.

Yet if you do allow your biggest customers to pay slower, you in effect become their lender, but without the benefit of collecting interest on the loan! Furthermore, they do not have to borrow money from their bank to pay you for a period of 90 days, but you still have to borrow against those receivables, and you have to pay interest to your lender in order to be able to manufacture or buy goods and pay your overhead.

What happens if you say "no" and don't extend the terms? Your customers could walk away and take their business elsewhere, and often will. And if one of those customers is a substantial portion of your sales, let's say 70 percent? You run the risk of suddenly operating at a loss and pushing your company into insolvency.

So what is the answer to what is essentially the perfect financial storm, created by the current economic downturn? There is no one ideal answer, but there are strategies you as a business owner can put into effect that can sustain you for several months until you can implement whatever additional measures are necessary to keep your business solvent.

In this Economy, Everybody's Hurting

What you first should know is that right now all types of companies are struggling to pay their vendors. In fact, it's likely your vendors are feeling the pinch just as badly as you are. If you, as one of their customers, do not pay them, then they in turn cannot pay their suppliers. Just follow the chain, link by link.

Yet, as a credit consultant, I have discovered that even in this economy most vendors are willing to work with their customers. Not many vendors want to be the bad guy and put your company out of business. They are by-and-large willing to work with you.

The good news is that you can make your vendors your lenders, just as your biggest customer wanted to do with you, as discussed above. But you can do it by creating a win-win situation for all parties involved. You don't want to hurt your vendors, just like they don't want to put you out of business. In other words, you can ease the financial burden of paying daily, weekly and monthly bills, and do so gracefully and with honor.

Making Your Word Your Bond

It's important to start by working with the collectors or credit managers who represent your vendors to create a situation in which your vendors know you will keep your word. If you have a large amount in the 90-day column and you're having difficulty paying it, you don't need to ask for new credit terms, but you do need to ask the vendor to accept a small payment in lieu of the amount you would normally pay if you were staying current.

I always suggest that businesses agree to pay a set amount weekly, no matter how small. If it's an exceptionally small amount, such as $100 a week, the credit manager may scoff at first, because at that rate he figures it will take you five years to pay off your debt. But if presented correctly, you can convince many credit managers to work with you. And as you keep your word by paying that set amount on time weekly, you'll regain that vendor's trust, and you may even be able to continue to do business together.

Once you've established that you can keep your word by never being late with those weekly payments, the next step is to tell that credit manager that you would like to continue to buy from that company. In order to do that, you agree to give the company a check equal to the amount of your next order. If your next order is $5,000, you send a check for $5,000 along with the order.

The next step is to then ask the credit manager to take that $5,000 and instead of applying it to the current order, apply it to your oldest invoices, the ones that are 90 days old or more. What happens then is almost like magic. If you continue to buy enough from that company, you can sometimes get current in as little as 60 days. And if you do get current, you don't have to make any more $100-a-week payments.

Let's say you owe $15,000 in the 90-day column. By taking that $5,000 and paying the oldest invoices, suddenly you have $5,000 in the current column and only $10,000 in the 90-day column. If you can do that two more times in the next six weeks, you'll have $15,000 in the current column and the 1-30 day column, but nothing over 90 days.

What looked like sure disaster has suddenly become a short-term win-win for everybody involved.

And on the Flip Side…

Of course, the flip side to all of this is that you can also use this technique as you're collecting from your customers. Just as you offered to do with your vendors, you can use small dollars weekly to test a customer's word. In these tough times, a business might not have the funds to pay down all its bills at once, but a business owner or manager does have his or her word.

It only takes three creditors to put you in bankruptcy. But if you know how to control both your receipts and disbursements, you control the company, making the services of a collector and credit manager even more important than that of a turnaround consultant. If I can control your payables, I can offset your slow-paying receivables. In other words, New York Credit can keep your vendors at bay diplomatically and by doing so keep your company out of a potential bankruptcy, even in the midst of the worst economy in 70 years.

For more information about how to effectively manage your credit and collections departments, call New York Credit at (310) 827-0076.
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