The Credit Market Crisis and What it Means to Small and Medium Sized Business.

By Lawrence Garvey

If your firm or company is anything like mine, the credit market crisis did not start last week but rather sometime late last year. What Wall Street is experiencing now has been apparent, on a lesser scale, throughout our region for some time. Lines of credit have been closed or reduced, small business loans have become almost impossible to obtain and the dire circular effects of this credit squeeze, now being prophesized by every talking head with a microphone, have been apparent to us for some time.

Receivables are way up, payables are climbing, good clients and customers are cutting back wherever they can and many of us find ourselves spending more time on business development and collections then actually completing the work needed to continue to feed the monster. When I first started my law practice, I asked a friend who had been practicing for a number of years, how I would know that my practice was a success? His reply was simply “you’ll know when you look at your accounts receivable they make you want to throw up”. Thankfully, my firm passed that threshold some time ago, but I now see that some small and medium sized businesses have their very survival at stake due to the uncollectability of the money they are owed from clients and customers who just a year ago were their best payers. This very real threat is the true fallout of the credit crisis, not the banks on Wall Street.

The situation leaves the small business owner in a tough spot. You need the money to continue your operations and you need the client or customer for your future survival. What if the client can’t pay? What if the customer goes bankrupt? Should the business owner get aggressive immediately, change payment terms, insist on everything up front and risk losing the business or alienating the client? What about the business owner’s vendors and suppliers, they have to get paid also, we need to survive as well!

The answer is threefold: Communicate, Negotiate, Litigate.

Communicate. Keep the lines of communication open with your clients and customers. We run our businesses on our personal relationships. If your client is slow paying call him or her up and find out why. Don’t even address the situation directly (believe me he or she will know why you’re calling) commiserate about the economy, read between the lines and find out if he or she is just slow in getting paid from his/her clients or if there is real trouble. If there is no personal relationship, call and ask when you can expect payment. Call early and call often. The squeaky wheel does get oiled and your job as a business owner is to work your way up your customer’s payment priority list. Most importantly, keep communicating, if possible through direct telephone or face-to-face conversations.

Negotiate. Start with your older receivables and offer them a discount if they pay quickly. A customer who has owed you five hundred dollars for over a year may jump at the chance to pay just $350.00. You get some cash, the customer gets a way out and maybe even the customer becomes a customer again. Try this also with your current slow pay customers. Be flexible, take some now and some later, work with the customer. Remember, right now CASH IS KING. These are not the times to be obstinate about full payment. You need to survive! Get what you can and move on. When times get better you may want this customer again. On the other hand, in a matter of months or weeks some of theses customers will be gone altogether and on their way out someone like me will be advising them on who they should and should not pay. Unless you have collateral or a personal guarantee, believe me, you will end up on the no pay list.

Litigate. When all else fails, use the courts. If you are in a lower invoicing business, figure out how the small claims courts work and use them. Don’t wait, file and again be open to negotiation. For larger collectables, get a lawyer. You may be surprised at how quickly a heretofore silent account will wake up and respond to the attorney’s letter. If the letter fails, then speak with your attorney about the cost analysis of full scale litigation. Be informed and make an informed decision. Attorneys have different payment arrangements and may work with you on a full or partial contingency or offer a flat rate. After all, we’re business owners as well.

Lawrence Garvey is partner at Cushner & Garvey LLC. Cushner & Garvey is a full service Law Firm with an emphasis on Business and Personal Financial Matters, Trust and Estate Planning, as well as Corporate Law, and Litigation. The firm represents clients throughout New York and New Jersey. For more information, visit their website at www.cushnergarvey.com or call (800) 644-2733.