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Credit and Collections:
Part Two

he counsel to the owners/managers of virtually all of today's emerging businesses is, if at all possible, "Don't get into the credit business; let the experts handle it for you." Credit provision and management has become a complex and competitive business.

          However, there are at least two reasons why the emerging enterprise may want or need to be in the credit business. First, providing credit to one's customers or clients is still a common practice in a number of industries. And, second, some emerging companies have excess cash, and see the provision of credit to be an attractive ancillary business. This second category of firms has elected to enter the credit business as a separate financial services business, not as an unavoidable marketing adjunct to its primary business, just as the General Motors Acceptance Corporation has become an implicitly autonomous (and very profitable) financial services operation. We are not focusing upon these kinds of activities.

          Engineering and construction represent one industry in which the provision of customer/client credit is prevalent and virtually inevitable. This is due to the magnitude of the purchase and the period of time over which the transaction occurs — ranging from months to several years. The most common arrangement is the provision of relatively short-term credit between the execution of the work and receipt of progress payments (approximately 40 to 60 days); however, there is customarily a 5 to 10 percent retainage or holdback payable only upon the satisfactory completion of the work, thereby increasing credit needs substantially especially towards the end of a project.

          Turnkey contracts are popular on certain kinds of projects; here, the engineer/constructor finances the total project receiving a lump-sum payment only upon the successful completion of the project. Finally, the engineer/constructor frequently retains ownership of the completed facility and simply leases it to the customer/client. In this later instance, if the ownership and financing are not transferred to a financial institution upon the completion of the project, it is to be presumed that the engineer/ constructor has also elected to be in the financial services business. These same patterns of deferred payments and often end-use without ownership are to be found in many industries, e.g., sale and lease options for capital equipment and aircraft.

          For any emerging business where the provision and management of credit is unavoidable, it is mandatory that we know our customer thoroughly to preclude the possibility of any distressing surprises. Debtor/creditor relationships are strained under the best of circumstances. Even when we are dealing with a fine old friend or a member of our own family, our knowledge of them as a prospective debtor is woefully inadequate. Two requirements must be met.

          First, it is essential that a full credit report always (even for old customers) be secured from at least one of the established credit investigative agencies, e.g., Dun & Bradstreet Information Services, Equifax, and/or TRW Information Services. It is hazardous and foolish to skimp on the integrity of these services. When the credit requests are substantial, one cannot be bashful about asking for audited financial reports and other evidences of credit-worthiness. Interviewing the customer's other creditors is encouraged. We can never know too much about a prospective debtor.

          And second, our relationship with our customer must be completely open and candid — and disciplined. Most credit problems arise because we had been too eager to make the sale, and forgot that a sale is not a sale until it has been paid in full. Enthusiastic salespersons deceive themselves, not their customers. We must insist upon adequate collateral, safeguards, and receive suitable liens; deposits or prepayments are often appropriate. Most importantly, we must be prepared to walk away from the sale if we have any reservations about the credit-worthiness of the customer.

          Knowing our customer thoroughly is the prerequisite for effective credit management. Late or partial payments or other deviations from the credit agreement must be challenged promptly — challenged face-to-face. If the customer is encountering difficulties, an early personal meeting often enables us to work out a revised credit agreement to help the customer without jeopardizing our own creditor position. Some of the strongest customer relations have sprung from supporting a good customer through a period of adversity. However, like helping a swimmer caught in an undertow, nobody is helped if our own position is not secure.

          For the emerging business, good credit management is simply knowing our customer thoroughly, and working with this customer one-on-one through good times as well as bad times. In the emerging company, there is no place for marginal business, collection agencies, or bad debts. The strength of the emerging business is the strength of personal bonds with key customers. A sound credit policy for the emerging business draws upon the strength of these personal bonds with key customers.

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Thomas A. Faulhaber, Editor

Telephone: 617.232.6596 — FAX: 617.232.6674

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Revised:  November   17, 2023 TAF

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