Disaster #3 - Business Delinquency Spike

Part 3 of a series: Avoiding Disastrous Debt Interactions

Inset shows 32% spike in Small Business Delinquency Index, 3/1 - 4/31/20

Stimulus trillions and generous forbearance terms have delayed the inevitable delinquency spike for consumers – but there’s been no such respite for small business. Take a look at the classic “hockey-stick” spike in March/April for the Paynet Small Business Delinquency Index. April’s is the largest month to month increase since the index began in 2005.

The pain is greatest in certain industries: retail and restaurants - no surprise – as well as healthcare, which may seem to be a surprise, but not when you consider all the checkups, elective procedures and dental work postponed due to Covid-19.

Small business debt disasters afflict many, but here are three key categories:

1) Commercial lenders: including conventional banks as well as the many fintech startups specializing in small business financing.

2) Business credit card issuers: Small businesses love Amex, Mastercard and Visa business cards, both as a financing source, and for the reward points.

3) B-to-B vendors:  Companies supplying goods and services to other businesses often fall prey to slow-pay, no-pay and bankrupt customers.

A few rules to follow – for everyone

Keep an eagle eye on payment behavior: Has a formerly prompt payer gone late, even by just a few days, or paid less than the amount due? That should trigger an immediate, but incredibly polite, call to the business owner to find out what’s going on.

Leverage the relationship: When it comes to choosing which creditors they’ll pay in a pinch, businesses gravitate toward the suppliers they depend on the most. Making sure your customers really count on you, and recognize your superior value, is vital in tough times.

Offer incentives Instead of threats: Even before there’s a problem, offer deals like a reduced interest rate for paying more than the minimum, or “cash discounts” for customers for pay upon shipment of goods. 

For commercial lenders 

Now is the time to deliver on that old unfulfilled promise of the bank acting like a real partner to its commercial clients.

Start by inviting borrowers onto Zoom ­­­­calls where bankers and guest experts teach Covid-19 survival tactics – and bank customers can share strategies with each another.

Some good topics include meeting Phase I, II and III reopening guidelines, sourcing PPE and other safety equipment, and even advice to help your customers avoid credit losses with their customers.

Of course, ongoing access to capital is a key business concern right now, and lenders should be the first ones helping their clients who qualify get into business relief programs such as the PPP.

For business credit card issuers

 As a business cardholder myself, I am routinely solicited to extend my credit, either by card issuers offering a business loan as an add-on, or a charge card like Amex encouraging me to activate an extended payments option. 

Now is the time to promote the opposite. For example: offer more reward points for paying in full…and before the due date.

It’s also the time cut interest rates for revolving credit as a reward for paying promptly.  After all, the cost of funds is practically zero right now. (I’ve said this before and apologize for sounding like a “broken record” on this topic!)

For B-to-B vendors

I feel especially for this group, because I’ve been there myself, having falling victim to bad-pay clients -- including a certain NYC real estate tycoon who later became a leading politician. Here are some essential business survival tips:

Avoid arrears billing in the first place.  “Bill me later” should be a relic of the past.  Today, you can debit a customer’s bank account or card the moment a product is shipped or service performed.  Alternatively, you can bill on a monthly retainer or subscription basis – always billing a month ahead, so a customer can never fall behind.

Don’t accept “boilerplate” terms.  Some corporate buyers issue contracts and PO’s pre-filled with ridiculous 60 or even 90 day payment terms.  Cross those out and replace with “net 15,” or better still, negotiate a non-arrears payment method, per above.

Call yourself, before using a collection agency or attorney. Often a call from business owner to business owner is the most effective collection technique of all. Each time, offer to pick up a check, or take a credit card or ACH payment by phone. (If you don’t accept cards and ACH now, it’s easy to set up through QuickBooks, banks and other providers.)

Beware of bankruptcy abuses. Did you know that when a customer declares bankruptcy, you can not only can lose money owed to you — but can be forced to pay back money you’ve already been paid? That’s the topic for next week’s post.