Preferential Debt Payments - The Importance of a Current A/R

 

Did you know if you allow your customer to pay beyond terms, you expose your business to paying 90 days of collection back?

We have discussed in previous blogs how important credit checking is when assessing prospective customers. Once credit has been approved for a customer and business has commenced, it is equally important that you see to it that credit terms are adhered to.

 

Why Should I Make Sure My Credit Terms are Adhered To?

When you are monitoring your credit terms, you are closely watching collections and making contact with customers’ payable departments when invoices have aged in excess of credit terms. You need to do this to determine if there are any potential issues. These issues typically include thing like:

  • A problem with the invoicing procedure
  • A dispute with the quality of the product or service you provided
  • The customer is having cash flow problems

If the customer is having cash flow problems, they have now become a credit risk and future business with this customer must be reconsidered and reassessed. The mistake that many companies make is they will allow their customer to pay late and continue to do business with them.

Not only do they continue to do business but they also continue to allow them to pay late. By ignoring the warning signs of a company that may declare a bankruptcy, companies place themselves in double jeopardy.

As soon as a customer files bankruptcy you will lose all of your open invoices almost entirely. Pennies on the dollar are typical settlements, if you get anything at all. However, that is not all you will lose. Section 547b of the Bankruptcy Code allows trustees to demand back all of the money you collected from that customer for the 90-day period prior to the bankruptcy filing. Refusal to pay will result in a lawsuit with the trustee.

 

How Can Factoring Help You Avoid Losing This Money?

Factoring with UC Factors eliminates almost all of the risk that companies have with their customers going bankrupt. We monitor and manage the collections of all customers that are factored with us. If we see warning signs of a customer’s credit going sour, we immediately notify our client and a new assessment of that customer is made.

If we don’t see the warning signs of a bankruptcy, which probably means there were no warning signs, then we take the loss from the open invoices and the loss from the 90 days of payments we received prior to the bankruptcy. The claim from the payments 90 days prior to bankruptcy may even happen after we have ceased doing business with our client since bankruptcy trustees have 2 years to assert that claim. The factoring charge that are client pays is very small when you consider all of the services provided combined with this significant insurance policy against credit losses.


One of the best ways to protect yourself from losses due to customer bankruptcy or other payment issues is to make sure you are working with a factor who is prepared to monitor and handle these situations. Take a look at how you can choose the right factoring company for you here:

How Do I Choose a Factoring Company?