This article is Part Two in a seven-part series on how to structure sales and what to do when your customer fails to pay. You can find Part One of this series here: Structuring Sales to Ensure Payment. Please subscribe to this blog by entering your email in the box on the left, or check back weekly for additional articles in the series.
With the recent economic slowdown in many sectors and the parade of corrupt corporate executives on the evening news, corporate managers are more sensitive than ever to signs of troubled business practices and how those practices affect outstanding receivables. Many distressed businesses display early warning signs of impending trouble, including some or all of the following:
- Lack of a sound business plan- The company may not have a plan or may have expanded past the vision of it original business plan.
- Ineffective management style- The management of a small company that has experienced rapid growth may not be able to delegate authority effectively.
- Poor lender/vendor relationships- The company may not respond quickly or fully to its vendor’s request for financial information or may actively hide information from its vendors.
- Change in market conditions- The market for the company’s product may have changed, leaving the company with a shrinking market share and lower sales. The company’s technology or marketing may be obsolete to compete in the current marketplace (remember 8-track tapes?).
- Over-diversification of products- The company may enter non-traditional markets too quickly in an effort to increase flagging sales but without the necessary resources or knowledge to
This article is Part One in a seven-part series on how to structure sales and what to do when your customer fails to pay you. Please subscribe to this blog by entering your email in the box on the left, or check back weekly for additional articles in the series.
Know Your Customer
Before entering into a transaction, obtain the following information and documents that will
help you determine if this is someone with whom you want to do business, and will help you set
the terms under which you want to do business. It will also assist in the event collection of a
debt is necessary.
1. Financial statements, including an income statement, a cash flow statement and a balance
2. Dun & Bradstreet- this is a subscriber service that rates businesses.
3. Trade references – these are references from other businesses with which your potential
customer does business.
4. Bank references- find out where your potential customer banks.
On December 3, 2009, the Supreme Court of Ohio decided the case of Mayer et al. v. Medancic et al., in an effort to clarify the calculation of interest on an obligation upon the occurrence of a default. As stated by the Court, “compound interest is not available upon a default on a written instrument absent agreement of the parties or another statutory provision expressly authorizing it.” Accordingly, lenders should ensure that their loan documents clearly state that interest will be compounded not only during the term of the loan, but also after default.
The case involved the calculation of default interest on three promissory notes executed and delivered by the Medancics to the Mayers. All principal and accrued interest on each note was due and payable at maturity and the Medancics failed to make those payments in each case. Although the maturity dates fell in 1995 and 1997, the Mayers did not receive judgment on the notes until May of 2006. The Mayers contended that they were entitled to post-judgment interest at the rates set forth in the notes, compounded annually, but the trial court held that the Mayers were entitled to post-judgment simple interest at the rates set forth in the notes. The Eleventh District Court of Appeals reversed, on the basis of the Supreme Court of Ohio case, State ex rel Bruml v. Brooklyn, which the Eleventh District held provided for “interest upon interest” and, therefore, provided for compound default interest. In doing so, the Eleventh …