DEALING WITH THE HIGH MAINTENANCE CUSTOMER: CREDIT, FINANCIAL AND LEGAL ISSUES FOR THE CREDIT TEAM Mark H. Speiser

mspeiser@unifiedgrocers.com

Scott Blakeley, Esq.seb@blakeleyllp.com

18500 Von Karman Ave, Suite 530

Irvine, CA 92612

V. (949) 260-0611 | F. (949) 260-0613

www.BlakeleyLLP.comOrange County | Los Angeles | New York | Delaware

What Makes an HMC (Experience from Credit Peers) Invoicing and Account Maintenance

Unauthorized discounts Unearned deductions Withholding full payment on disputed invoice. Out-of-date IT requirements Cumbersome claim procedures to discourage resolution Overly stringent supply chain requirements that appear to be

profit centers Always asking for copies of invoices and POD’s EDI invoice receipt issues or a lack of compatibility Manual entry of invoices into vendor A/P portal Insists on order changes outside of normal operating processes

Failure to comply leads to deductions

What Makes An HMC Credit Terms and Payments

Consistently slow pay, requiring countless phone calls and emails Indispensable customer creates obstacles to payment, resulting

in holding orders, impacting inventory, DSO and cash flow Terms pushback: unilaterally changing terms Demands continued shipment/service with no payment Short pay invoices “Lost” payments with checks Regularly bounce checks Repeatedly make false payment commitments with multiple

excuses

Cost of Write-Offs

Due 1 2 3 6 9 12 24

Is Customer an HMC?

Credit policy: Tolerance limit Percentage of the invoice that is acceptable to stay current Minimum amount to avoid credit hold Dispute resolution practice

Key supplier metrics DSO Collection Effectiveness Index Days Inventory Outstanding Cash Conversion Cycle Cash flow and working capital management

The Credit Team: Gatekeeper or Relationship Preserver

Who has the leverage in the relationship? Punitive or accommodate response:

reconciling the account under traditional and modern credit approaches

Leadership objectives and the voice of the sale's team

Net Income (after operating costs)? Policy and procedures for reconciling to

account, managing A/R and collection strategy

Robinson Patman antitrust considerations

Industry Information Regarding HMC's Warning signs of delinquencies

A/R aging High credit risk score Timing for what is considered delinquent Collections Judgments Liens Bankruptcy Likelihood of small business to become severely delinquent Monitoring accounts

Tighter lending practices Vendors as lenders

Social media and non-traditional sources to measure credit risk

Monitoring of bank lending, term dates and covenants

Revisiting A/R Portfolio and Credit Policies

Examine traditional signs of customer defaults and adjust policy accordingly

Point person for change in terms, credit hold or credit enhancement

Is credit policy too restrictive or too liberal? Too loose or too restrictive must be formulated within the context of company

goals and profit margins

Adjusting policy to signs of customer defaults Using past insolvencies for predictive data points - data points

are then run against current profile to further refine portfolio risk

Preserving the HMC Through Contract and Credit Enhancements

Dealing with Past Due Invoices yet Maintaining Sales

Ways to determine type of HMC (Is the relationship salvageable?) Request for financial information and confidentiality agreement Third party comment

Salesperson and credit pro customer visit Contact customer’s bank Talk to industry group members and other suppliers Landlord

Repayment agreements: fixing indebtedness and waiving claims

Credit enhancements Dealing with insolvency

HMC Divorce

Divorce or preserve the trade relationship? Indispensable customer? Collaboration with leadership, sales and credit Dropping the HMC may raise revenue and

reduce expense Economic conditions may force some credit

teams to preserve HMC Timing for assigning account to third party for

collection Document preservation with delinquent account

Insolvency and Preference Risk with HMC

Is customer an HMC because it can or because it must

Red flags that HMC may be insolvent A/R risk Preference risk

Email communications