DO YOUR CUSTOMERS PAY YOU OR ARE YOU THEIR BANK?

If you run a business chances are you pay your suppliers on the 20th of the month. You expect that your customers will pay you then too. That’s the normal course of business.

But when things get tight, some of your customers might be struggling. Maybe they’re slower paying you, or they don’t return calls like they used to. You hear stories of financial problems.

And you don’t wish that on anyone.

But why should you be the sucker left holding the can if it falls apart?

Lets say you’ve sold your products to a company and they’re haven’t paid you. Then the company goes into receivership. What does that mean for you?

The receiver will have been appointed by the company’s bank or another secured creditor. Secured creditors have first dibs if things go bad because they will have charge over the company’s assets and cashflow. Most normal trade creditors will be in the queue behind the secured creditors and will get paid IF there is money left over.

Because people know this, too many small businesses just assume that they’ll miss out if the company goes into receivership owing them money. They think the products they’ve supplied will be snapped up by the receiver and sold to pay secured creditors.

But it doesn’t need to be like that.

There are some steps you can take to protect yourself:

  1. Terms of Trade:
    Lets examine the Terms of Trade you give to customers when they buy off you. If you don’t have Terms of Trade at all you’re in trouble as that is fundamental. I know some don’t.
  2. Romalpa clause:
    If you do have terms of trade, do they include a “romalpa” clause? This is a clause that states that you still own the products you’ve supplied until you’ve been paid for them. Even if they are sitting in the customer’s yard!
  3. Register a charge in the Personal Property Securities Register:
    This is standard nowadays. You can record that you have a “Purchase Money Security Interest” over the goods that are sitting in the company’s yard.
  4. Acknowledgment:
    Did you get the company to sign your Terms of Trade to acknowledge the above points? If you did then you’ve got a chance.

There are other things you can also pay attention to:

  1. Credit checks:
    Think about this whenever you are providing goods on any sort of credit arrangement. Especially for a new customer. Do they have a track record?
  2. What else do you know about the customer:
    For example, if they have left your competitor to come to you, why? Are they a difficult customer? Did they actually pay your competitor? Do you want them as a customer?
  3. Money up front:
  4. Personal Guarantee:
    If the customer is a company, should you ask for a personal guarantee?
  5. Extra Security:
    If it is a substantial job or supply, can you get a mortgage over property, or a bank bond?
  6. No Credit:
    Should you offer credit at all? Or should you insist on cash on delivery?
  7. Sales and Marketing:
    More fundamentally, what sales and marketing activity are you doing? If this is your one big customer and you really need the job, and are deluded by the money that you’ll make if it comes off, then you need to get out more. Go and get some more customers.

​Let us help:

Queenstown Law phone 03-4500000 or russell@queenstownlaw.co.nz