Observing the gloom and doom which is manifest in today’s financial markets, particularly in the financial sector, you may wonder what impact this will have on your client’s expenditures. It is unknown how much longer the present financial shakedown will continue and how many additional banks will experience failure. That being said, you might also want to ask the question “What impact this will have on my business beyond customer spending?” Below are several items to consider and steps you might take to avoid headaches down the road:
1) Protect Cash Balances in Excess of $100,000
The Federal Deposit Insurance Corporation (FDIC) insures depositors up to $100,000 per institution. If you have or carry balances greater than the $100,000 in a particular institution and that institution happened to fail could your business survive? Consider using Certificate of Deposit Account Registry Service (CDARS). It is a convenient way to enjoy full FDIC insurance on deposits of up to $50 million. Select financial institutions can offer CDARS because they are members of a special network. When you place a large deposit with a network member, that institution uses CDARS to place your funds into certificates of deposit issued by banks in the network. This occurs in increments of less than $100,000 to ensure that both principal and interest are eligible for full FDIC insurance. For more information on CDARS go to www.cdars.com
2) Preserve and Insure Available Lines of Credit
You currently have a Line of Credit which you may or may not need to use. As Banks start to respond to the current market conditions they will tighten their credit extension policies, lower credit limits, in some instances withdraw from certain markets (geographies and/or market sectors) and call or cancel lines of credit. It is a prudent course of action to always have two or three suitors competing for your business. Look at vendors as alternative lenders and push them for higher credit limits based on your payment history. Investigate whether or not any of your strategic partners have captive finance subsidiaries. A captive’s primary business object or charter is to promote the flow of the parent’s goods and services into the marketplace. If you do not have a relationship with a captive finance subsidiary, then you should consider establishing one.
3) Safeguard Your Banking Relationship
When was the last time you met with your banker for no particular reason other than to say hello and keep them posted on your business’s health? Bankers still have lending requirements and can never hear enough good news. Invest in the health of your banking relationship by spending quality time with your banker. Additionally bankers routinely move between jobs and are always looking to carry solid relationships with them.
4) Update Your Credit Policies and Customer Credit Limits
Do you have signed Purchase Orders, Statements of Work, Customer Agreements, Security Agreements and UCC-1s (A UCC-1 filing will record and protect a secured party's interest in the collateral) in place for all of your customers? When was the last time you updated your credit application, reviewed your credit extension policies or obtained and studied your client’s financial statements? You should consider having your legal agreements reviewed and updated by outside counsel due to continued changes in laws and regulations. Encourage your counsel to use a “Plain English” style in order to avoid wasted time due to your painful explanation of unduly structured legal language to your clients. Consider filing UCC-1 statements with your most material clients. Consider a courtesy collection call with your clients ten days prior to the due date of an invoice. This can be done under the pretense of customer satisfaction, sets their expectation as to the due date and seeks their affirmation of timely payment.
5) Consider Third Party Financing Alternatives
Do your customers always pay with cash on a timely basis for all their purchases? More likely they do not. Consider exploring third party financing such as a leasing or third party billing services provided by your strategic business partners and/or their captive finance subsidiary. It is a convenient and useful way to spread your collection risk outside of your business.
About the Author: Warren R. Turner is the Managing Partner of Cardinal Points Group. He coauthored and teaches “ Dancing with the Elephant, Managing a Profitable Services Practice”. The course has been delivered to over 4,000 VAR and SP business owners in 25 different countries. He may be reached via email at wturner@cardinalpointsgroup.com or by telephone 770-913-0048.
