March 9, 2023

Credit professionals have reported an increase in payment delays as customers feel the pressure of inflation, supply chain issues and overarching economic volatility. Late payments are more costly than usual in today’s environment as the federal funds interest rate sits at a 15-year high of 4.25%-4.50%—with the expectation to reach 5.66% by the time the Federal Reserve is finished with its rate hikes. Now is the time for credit professionals to remind customers of any late fee or interest rate policies to encourage timely payments.

“During our terms of sale, we put a note in the credit application indicating that we will charge interest to the maximum extent the law will allow,” said Kenny Wine, CCE, director of credit at Joseph T. Ryerson Son, Inc. (Little Rock, AR). “Different states have different usury laws, so there is a maximum you can charge a customer. We put language in there as another tool to leverage and facilitate a conversation to correct the problem. It is not necessarily a free revenue generating source for us, but it gives us that potential if a customer does not pay us for a year and we had to take them to court, we could get the cost of capital back during that time.”

Yet many B2B credit professionals struggle to successfully collect late fees, and some do not use it as a tool at all. A recent eNews poll revealed half of creditors do not charge late fees. Of those who do charge, 33% are successful in collecting only a quarter or less of late fees. “When dealing with late payments from consumer businesses such as a car payment, it was fairly easy to collect fees back in the day,” Wine said. “But when I got into the B2B world, customers were less likely to pay the late fees or interest if charged.”

How to Enforce

Include specific language that covers potential late fees and interest in multiple documents so there are no questions. Make sure that language is repeated in your credit application, order acknowledgement, invoice and terms and conditions. Phrases like “Highest percent allowable by law” will give your credit department the most flexibility when collecting fees, especially for those selling to customers in different states. But you also can get more specific by using the phrase “Invoices not paid within X days are subject to a finance charge (or service fee) of X% per month.”

For example, if you set an annual interest rate of 12%, the monthly fee for your customer would be 1% (12% ÷ 12 months = 1% per month). If a customer is late on a $100,000 invoice, they would be charged an extra $100. Do not describe any fees or interest as a “penalty” because it could backfire if you need to go to court.

Customers should be made aware of your late fee policy ahead of time to avoid awkward conversations. It is equally as important for you as a credit professional to hold your late-paying customers accountable. Follow through on charging late fees whenever possible, or at least notify the customer that you intend to charge a fee if they do not pay the owed amount.

“We’re successful in collecting about 50%-75% of default interest,” said Jason Mott, CCE, NACM Board director and corporate credit manager at MFA Incorporated (Columbia, MO). “For some customers, we may settle for smaller payments only because we need to take what we can get versus not taking anything at all—which increases the opportunity to lose everything. We make the business decision to take what we can get.”

When and When Not to Charge

If your company is in a cash crunch, reminding customers about your finance charge policy could help get payments in the door quickly. But it is crucial to remember the complexity of the creditor-customer relationship in the B2B space.

Deciding the appropriate situation to charge fees is a delicate balancing act. For example, you do not want to ruin a positive relationship with a customer who is unable to pay due to factors beyond their control. “We were being asked to waive some interest fees for some customers because low river levels prevented them from delivering crops to the end user, which is not really their fault,” Mott said.

Have a conversation with your customer before jumping straight to charging a fee. Doing so will help decrease tension and maintain a positive relationship. But in extreme cases “where the relationship has already gone downhill and we’ve obtained a judgment, we then have the right to garnish bank accounts and pull from paychecks involuntarily,” Mott said.

An alternative to charging late fees is offering a small discount for early payments, which might be beneficial as we head deeper into rocky economic waters. “Our repayment history has been pretty good over the last couple of years, but I see the potential for that to change this coming year,” Mott said. “I think it’s going to be very interesting to see what our repayment history is going to be this coming year.”

Due to supply chain challenges, more companies are seeking alternative suppliers, resulting in an increase of new customer credit applications. But even a well-established business that has been buying from other suppliers needs the same degree of risk assessment as a new company. How they abide by terms and pay other suppliers could be an indication of how well they will pay your company.

Credit applications are the first line of defense against risk. Risk mitigation starts the moment you receive a credit application from a customer, whether online or on a hard copy. Are there any red flags? Does the customer information make sense and is it consistent? Is this customer creditworthy? Building a solid credit application sounds simple enough, but not asking and subsequently confirming critical information can make the application close to worthless.

Prioritize KYC Practices

Know Your Customer (KYC) is a standard when assessing creditworthiness. It is the basic purpose of a credit application and helps the credit manager gather detailed financial information so they can make an informed credit decision. The more pertinent information you can gather ahead of time, the easier your review will be, said Jordan Peloquin, credit manager at Ozinga Bros., Inc. (Mokena, IL). “Customer supplied credit references, in addition to credit references you find, help you see how well-established the customer is.”

First and foremost, the credit application should fully and accurately identify the customer; the full name and legal identity of who is responsible for payment. The name on the credit application should match exactly to the name on the purchase orders and on the invoices. This is not only relevant for enforcing collections, but also necessary to comply with Know Your Customer (KYC) for Restricted Party and Anti-Money Laundering laws.

To properly identify the customer, information required on the credit application should include the applicant’s full name, address, type of entity, contact information, tax ID number, disclosed bank and trade information. You should triple check to verify that the customer information is correct and consistent throughout the application and that name is incorporated in any guarantee, “What many consider ‘excess language’ is there for a reason,” said Emory Potter, partner at Hays & Potter, LLP (Peachtree Corners, GA).

When it comes to online credit applications, the customer-provided information isn’t always accurate or adequately inputted. “People may not understand what they are entering, so it may be just an off-the-wall deal that can work against them,” said Matthew Jameson, attorney at Jameson and Dunagan, P.C. (Dallas, TX). “But getting customer information through one-on-one conversations, preferably with an attorney, can help mitigate that risk.” As with any credit application, online or hard copy, it is the responsibility of the credit professional to confirm all information.

Establishing Terms & Conditions

The purpose of having a signed credit application is to protect your company’s interests. “Make sure your credit application has adequate verbiage to ensure your interests take priority over any notations on a customer purchase order to cover all purchases on open account terms with your company,” said Brett Hanft, CBA, credit manager at American International Forest Products, LLC (Portland, OR).

When discussing collections with your customer, refer back to the credit application, advise them of the terms they agreed to and that you expect them to live up to the agreement, said Peloquin, who uses the credit application as a contract to collect payment. “When an account gets elevated to a collection company or our legal team, the credit application provides a basis for the ‘breach of contract.’”

The terms and conditions on the credit application should include an interest provision—the creditor’s right to collect finance or interest charges if a customer fails to pay on time. Quite often, credit applications are completed by someone in procurement or accounts payable who does not have authority to bind the company to payment of any interest or collections costs that may be incurred. To improve the chance of enforcing such a clause, it should be acknowledged separately on the credit application with a separate signature or initial.

The credit application should be signed by an individual authorized to obligate the company. If uncertain as to the authority of the signatory, ask for a corporate resolution or other document that validates the signature. Peloquin's credit application has verbiage that allows his company the rights to collect finance charges and legal fees incurred.

“In most states you’re going to need a written contract in order to charge a maximum rate,” Jameson said. “The problem with that is if you don’t have a written contract, then you could have a usury violation which is the charge of an unlawful interest rate which there is a severe penalty for.”

A personal guarantee ultimately determines whether a creditor gets paid and must be tailored to the business. “It’s very easy and inexpensive to set up an LLC or any type of entity without the help of a lawyer,” Jameson said. “But you have to include a personal guarantee because if the debtor doesn’t pay, the personal guarantee will allow you to sue an individual for the debt owed or credit granted.”

Beware the Battle of the Forms

A company would have to evaluate the importance of what clauses would be skipped by having a credit application serve as their legal contract with a customer, said JoAnn Malz, CCE, ICCE, NACM Chair elect and director of credit and collections at The Imagine Group LLC (Jordan, MN). “If they use the credit application as a binding contract, then key clauses should be in the credit application with a notation that the credit application takes precedence over all PO’s.”

Creditors must be cautious when accepting purchase orders, Peloquin said. “In most cases, a customer's written purchase order will state that their document supersedes prior agreements, which includes the terms and conditions.” This can be prevented by amending a purchase order issued by the customer, or having them sign the order acknowledgement that reinforces the terms and conditions.

But changing terms and conditions after they’ve been set only leads to trouble for the creditor, breaking consistency and leaving room for error.

An area of conflict between the customer purchase order and the credit application is the identification of the legal venue. “In some states, you can designate a venue for when to file suit in the venues provision, which can work in your favor,” Jameson said. To ensure those provisions, such as exclusive jurisdictions, are valid, the application must have a signature block where the customer agrees to all of the terms and conditions and certifies that all information is correct.

You don’t need to revise your credit application every few years, said Jameson. “Creditor legal principles will not be much different twenty years from now but if you have a strong credit application tailored for your company, it can last you a very long time.”

Join us in-person this summer from June 11-14 for Credit Congress in Grapevine, TX to learn more from Potter and Jameson.

Mechanic’s liens are one of the strongest tools that construction credit professionals can use to mitigate the risk of nonpayment. But filing a mechanic’s lien correctly and on time can be a challenge as each state has its own laws governing the steps it takes to file the lien—and those laws can change quickly.

Failing to properly file a mechanic’s lien can cost your company hundreds of thousands of dollars if your customer does not pay. But credit professionals do not always have the spare time to comb through the laws in every state or keep up with any changes on their own. That’s where NACM’s Lien Navigator comes to the rescue.

“Since I decided to subscribe to the Lien Navigator, it has saved me so much time in the long run,” said Theresa Lightfoot, credit assistant at Clopay Corporation (Mason, OH). “I feel more empowered having the information on the laws of each state of the project at my fingertips. It helps from the onset to know if it is necessary to send the ‘notice to owner’ (NTO) right away, or if it can wait.”

Although the internet is a useful tool for researching about state statutes, it is not always accurate. “Many times, when you’re looking at this information on the internet, it’ll only focus on the mechanic’s lien statute of that state but our Lien Navigator is all inclusive,” said Chris Ring of NACM’s Secured Transaction Services. “It helps you understand what you have to do and when you have to do it to make sure that your lien and bond rights are maintained.”

Stay organized with statute information in all 50 states, the Canadian provinces and U.S. territories—especially when selling to customers in multiple areas. If you don’t stay organized, you run the risk of losing lien or bond rights. “Google is a great tool but are you looking at the most recent statute or are you looking at an older one from 2013?” Ring asked. “Once you select the state and project type, you are given detailed steps to take next, from the notification in order to preserve the right to file a mechanic’s lien and when it has to be served.”

The Lien Navigator is a multi-purpose tool that can elevate your credit department and ease the worry of missing a mechanic’s lien filing deadline, said Ed Buchanan, corporate credit manager at Chatham Steel Corporation (Savannah, GA). “We take advantage of the states tab to stay updated on statutes and the quick links section for training and updating our team members,” he said.

The “States Requirements at a Glance” link in the “Quick Links” section of the Lien Navigator is so helpful, Ring said. Among other things it details those states that require preliminary notices quickly after first furnishing, states that allow you to file a lien when selling to a sub-sub-contractor and our “Construction Credit Academy” has unique state webinars, webinars on waivers, a webinar on bankruptcy considerations, and so much more.

NACM’s Secured Transaction Services acts as an extension of your credit team with superb customer service. Anybody who subscribes to the Lien Navigator has 24/7 access to the Construction Credit Academy, which offers a selection of free webinars on a variety of construction topics. “The most important aspect of our Lien Navigator really is our customer support because we provide a lot of information which is extremely helpful to our members,” Ring said.

Take $100 off your first year of the Lien Navigator for this month only! Offer is valid for first-time subscribers only. Enter code LUCKYLIEN at checkout to redeem.

More than a decade after Democrats and Republicans first united to introduce bankruptcy venue reform legislation, Congress is still trying to make headway on the issue.

Last month, Congresswoman Zoe Lofgren (D-CA) and Congressman Ken Buck (R-CO) reintroduced H.R. 1017, the Bankruptcy Venue Reform Act, legislation aimed at curtailing bankruptcy “venue shopping” by requiring that bankruptcy proceedings take place in the venue in which the entity has its principal place of business or the majority of its assets.

The original bill, introduced on July 14, 2011 by former Members of Congress Lamar Smith (R-TX) and John Conyers Jr. (D-MI), who led the House Judiciary Committee at the time, looked promising. In addition to banking sponsored by the leaders of the Committee it needed to pass, it was also co-sponsored by the leaders of the Subcommittee.

Congressman Smith was personally invested in the issue because of a very publicly notorious corporate bankruptcy—Enron. Based in Houston, Texas, with more than 7,500 employees and $60 billion in assets, Enron took advantage of current bankruptcy venue laws to file for bankruptcy more than 1,500 miles away in New York. To then-Chairman Lamar Smith, this denied thousands of Texans access to the bankruptcy proceedings, harming Texas small businesses and thousands of former Enron employees alike.

For Congressman Conyers, the story was very similar. In 2009, Chrysler and General Motors, both based in Congressman Conyers’ hometown of Detroit, filed bankruptcy in New York. He saw his constituents lose their jobs and their entire retirement, forced to choose between traveling to New York to present their perspective to the court or save money, stay home and hope for the best.

Less than two months after introduction, the bill had its first Committee hearing in the House Judiciary Subcommittee on Courts, Commercial and Administrative Law. At the hearing, the majority of expert witnesses testified in strong support of the legislation, fully debunking the arguments presented by the sole opposition witness that the New York and Delaware courts have greater expertise and are better equipped to handle bankruptcy cases. NACM also submitted a letter for the record strongly in support of the bill.

Unfortunately, that is where all progress halted on the bill. The political reality of this issue is that while there is significant bipartisan support for fixing the broken rules that allow corporations to venue shop, there also is significant and influential opposition. The current Majority Leader in the Senate, Chuck Schumer, represents the State of New York, a state which benefits significantly from the status quo. Additionally, large corporations with a significant lobbying and political presence have a strong incentive to kill this bill and similar efforts.

Overcoming these hurdles and getting the bill passed this Congress is an uphill battle, but it is one we can win. Ultimately, politics is local, and depriving smaller debtors the opportunity to meaningfully participate in the bankruptcy process has significant local consequences. So, remind your Member of Congress that bankruptcy venue shopping is hurting their district and their constituents, and urge them to support H.R. 1017.