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The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale
Scott E. Blakeley, Esq.seb@blakeleyllp.com
Jerry BaileyExecutive Sales & Education Services
jbailey@ncscredit.com
Larry Durrant Manager, Order to Cash Americas Service Team
larry.durrant@upm.com
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The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale
April 2015
3rd Party Backstops
Letter of Credit
Credit Insurance
Factoring
Guaranty
Credit Card
Debtor’s Assets as Backstops
Certificate of Deposit
Junior Security Interest
Restructuring Agreement
Vendor’s Assets as Backstops
Purchase MoneySecurity Interest
Consignment
Stopping Goods in Transit
Reclamation
Offset
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The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale
Introduction Bankruptcy Concerns
Preference claims Fraudulent conveyance claims Turnover Actions Strong-arm powers
Bankruptcy Risk Automatic Stay
April 2015
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The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale
Credit Enhancements Letters of Credit
Types Standby – Only drawn on in the event the buyer doesn’t
pay. Documentary – Always drawn on. Generally used in for the
international sales.
April 2015
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The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale Letters of Credit (cont.)
Advantages Gives the buyer the opportunity to establish a credit history Uses the bank as a fallback in case the buyer doesn’t pay If the expiration is far enough out (or extended), additional time
can be granted for payment Can be drawn on even after bankruptcy Drawings generally not considered a preference Assures payment whether or not the goods conform to the
contract Cost
Disadvantages Cost Documents must conform Administrative burden
April 2015
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The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale
Letters of Credit (cont.) Tips
Allow time for late payment, shipping or manufacturing delays, etc.
Better yet, allow for an extension at seller’s request Examine terms and conditions carefully, particularly the
beneficiary’s name Preferably the letter of credit requires only an invoice, a
sight draft, and a statement that the invoice is past-due for a drawing
Allow for partial drawings.
April 2015
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The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale Article 1: General Provisions
Article 2: Sales
Article 2A: Leases
Article 3: Negotiable Instruments
Article 4: Bank Deposits and Collections
Article 4A: Funds Transfers
April 2015
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The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale
Article 5: Letters of Credit
Article 6: Bulk Transfers
Article 7: Warehouse Receipts, Bills of Lading
Article 8: Investment Securities
Article 9: Secured Transactions
April 2015
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The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale
Blanket, or Basic
Purchase Money
Security Interest
April 2015
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The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale Priority in UCC Filings
Claims are paid based on where they are situated on the claims priority ladder
April 2015
Pre-petition Unsecured Creditors
Pre-petition Unsecured Creditors
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The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale
Equipment vs. Inventory Is your customer reselling or using your products
in their business?
April 2015
INVENTORY (GOODS) EQUIPMENT
Customer resells the goods to another entity
Customer uses the goods in the course of
their business
Search Contract
Notify 20-day Rule
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The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale Two Required Elements
April 2015
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The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale Perfecting Consignment
April 2015
1. Consignment
Agreement
2. Financing
Statement or UCC-1
3. Search and
Notify
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The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale
Mechanic’s Lien Filing Process: Three Steps
April 2015
NoticeNotice LienLien ForeclosureForeclosure
XX days from first furnishing
XX days from lastfurnishing
XXX months / year from lien filing
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The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale
Certificate of Deposit
Guaranty: Personal and Corporate
April 2015
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The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale
Credit Insurance Considerations
All accounts or select accounts Type of policy Deductible, annual limit
April 2015
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The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale
Credit Insurance (cont.) Advantages
Can improve seller’s bank financing Allows an unbiased third party to review your credit portfolio Can help to increase sales Premiums are tax deductible No bankruptcy risk No relief from automatic stay required
Disadvantages Cost Perception that credit insurer replaces the credit department Preference risk
April 2015
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The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale
Put Option/Put Contract Factoring Maximizing Recovery Where There is No
Credit Enhancement Credit Applications
April 2015
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The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale
Restructuring Agreement Stopping Goods in Transit Reclamation Offset (Setoff) Alternative Payment Methods
Credit Card
April 2015
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