Three Steps to Consider if a Customer is Going Down the Tubes

By: Neil J. Smith

Imagine this scenario – your business has a major, long-time customer. The customer has been paying on its invoices, but payments have been coming more and more slowly, and there is now a substantial balance due on the account. On top of all that, you just sent them a large shipment of custom widgets on a special order.

Then you see a news item that the customer has announced layoffs and it looks like a bankruptcy filing may be imminent. Then your salesman walks in the door and happily places another big order from the customer on your desk. Rather than (or perhaps in addition to) reaching for that bottle of Tums®, there are some concrete actions that you can take to try to minimize the damage.

1. Your first option is to consider making what is known as a demand for adequate assurance of performance. Under the Uniform Commercial Code, which governs the sale of goods in New York, when reasonable grounds for insecurity arise with respect to the performance of either party, the other may in writing demand adequate assurance of due performance. Until a demanding seller receives such assurance, a seller may (if commercially reasonable) suspend its performance if it has not already received the agreed payment from the buyer.

Therefore, your first option is to write letter or email to the customer to inform them that you will not fulfill their newest order until you have assurance that they have sufficient funds available to pay the invoice. This can at least get you out of having to fulfill the latest order and getting in any deeper with the struggling customer.

2. When you discover that a customer actually is insolvent, the second option is to consider making a reclamation claim. Under the Uniform Commercial Code, where the seller discovers that the buyer has received goods on credit while insolvent the buyer may reclaim the goods upon demand made within ten days after the receipt of goods by the buyer. In other words, the seller may demand that the goods be returned.

This is not a perfect solution, however – making a reclamation claim can foreclose other legal remedies, and other creditors (i.e. the buyer’s bank) may have superior lien rights to the goods once the buyer receives them. You also have to know that the buyer is insolvent, and practically speaking there has to be some re-sale value to the goods that are returned or otherwise it would be pointless to demand them back.

3. The third option when you discover that a customer is insolvent is to stop making deliveries except on cash on delivery terms. Under the Uniform Commercial Code, where the seller discovers the buyer is insolvent it may refuse to make additional deliveries except when the buyer is able to pay in cash. Like the first option, this is a step designed to stop the bleeding by getting the seller out of having to make new deliveries on credit to a buyer who is unable to pay.

While none of these options can prevent a loss from happening, they can help to prevent the problem from getting any worse.


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