Whatever
your personal (or institutional) view of the near-term economy, we know the
economy moves in cycles. Based on what
we’re seeing, every responsible manager should be thinking about preparing for
a downturn. While in some situations,
taking a conservative (or even pessimistic) view could limit an organization’s
annual growth opportunities, this article will briefly review several ways that
preparing for a slowdown can be profitable (or, at least, not costly).
- Don’t cut corners on credit standards. As business slows down a bit, resist the
temptation to reduce credit standards just to increase the volume for the
time being. If customers reduce
their acquisitions of equipment, then there are probably pretty good
reasons for them to do so. Be sure
to follow your company policies on the new deals. Get all of the financial
information about the business upfront.
Review the credit histories and the references. Credit officers
need to be extra diligent at this point to make sure the new transactions
are appropriate and don’t carry undue risk into a period of economic
slowdown.
- Don’t cut corners on documentation. We always hope the customer will pay on
time and as agreed, but we have to prepare for the possibility he or she
will not. Expect the best, but also
prepare yourself for the worst.
Make sure the “i”s are dotted and the “t”s are crossed.
Next, file proper UCC-1 financing statements. Make sure the signatures are proper on
all the documents. Do your own
follow up and run a check to make sure the LLC or corporation is properly
registered where they say it is.
All of the basics should be reviewed as well to make sure the
transaction is well documented.
- Do maintain a closer watch on the payment performance of the customers. During the good times, when everyone is
busy writing new deals, there might be a tendency to be less concerned
about slight (or not so slight) payment delinquencies. In the event delinquencies may happen
and a slowdown does occur, maintaining a watch on payment performance is
crucial. When preparing for a
slowdown, remember that the slowdown will likely affect your customers,
too. If cash tightens for them, you
will want to know sooner rather than later. Keep documentation on late payers for a
quick reference.
- Do step up collateral checks. Whether the
transaction is inventory financing or equipment leasing, knowing where
your collateral is (and what shape it’s in) is critical when payments slow
down or cease altogether. If new
business is slowing, consider spending some of your “spare” time visiting
customers to look at their operations and at your collateral. This way, your customer will know that
you are genuinely concerned about their business. Not to mention, you will
be able to evaluate where and what kind of shape your collateral is in
first hand.
- Do keep your ear to the ground. Conduct periodic credit checks or trade
references. You may find things in
the credit checks or references that your customer might not tell
you. If your customer is having
problems, you want to know about it.
This way you can inform them of any upcoming changes that are about
to occur. If a stampede is about to
begin, you want to be leading it or out of the way! Don’t get blind-sided.
- Do review your relationships with your enforcement vendors. Your favorite asset managers and
enforcement counsel should already be familiar with what you need and the
way you like to do things. If you
haven’t talked to your principal contacts recently, give them a call to
make sure you know how to get fast action when you need it. They will be happy to hear from you and
will welcome the opportunity to help you get prepared.
Getting
ready isn’t difficult. It’s pretty much
what you should have been doing all along.
These six steps may help you refine what you have already implemented,
or give you a guideline of what you should be doing to begin the New Year. A rising tide floats all boats. Shaky deals, poorly documented transactions,
and risky customers all tend to be hidden by the good times. They are the ones that will show themselves
when the downturn comes.
Robert S. Bernstein, Esq. of Pennsylvania is board-certified as a Creditors’ Rights Specialist and a Business Bankruptcy Specialist by the American Board of Certification and is the author of Get P.A.I.D. (A Guide to Getting Paid Faster and What to Do if You Don’t). Find it on amazon.com (search "bernstein get paid") or www.getpaidsystem.com. The Bernstein Law Firm (www.bernsteinlaw.com) contains more Creditors’ Rights Specialists than any other law firm in Pennsylvania.