Credit Where Due

Steering Past Adversity

Clients dealing with financial hardship due to global crises, like COVID-19, may require specialized plans for payment. BY JOHN SLOAN

“True genius lies in the capacity for evaluation of uncertain, hazardous and conflicting information.” –Winston Churchill

Credit professionals have certainly faced unique and unprecedented challenges this year. The coronavirus pandemic along with civil unrest have devastated many businesses and severely impacted the advertising marketplace. On the positive side, the election may provide some sorely needed ad dollars. But extending credit to, and collecting from, advertisers affected by the volatile environment requires thoughtfulness and creativity.

The key to solving problems of this magnitude rests in breaking them down into manageable pieces. First, categorize and group customers with common problems and determine action steps for each group. Priority should be placed on analyzing the 20% of customers who account for 80% of one’s revenue.

The focus should be on advertisers since the ability of agencies to pay is wholly dependent on their ability to collect from their clients. Joint and several payment terms – which holds both agencies and advertisers liable for payment until media is paid – are helpful in getting agencies to cooperate.

The analysis should result in groups of customers with the following characteristics: 1.Customers who have suffered financially and cannot recover and who are not currently placing schedules; 2.Customers who have suffered financially but are in the process of recovering and want to continue to advertise; 3.Customers that are unaffected by the pandemic or have not experienced any disruption to their business.

Each of these groups requires a different solution, and one should refrain from treating them the same. Above all, relaxing payment terms for everyone is not a viable approach and should be resisted.

The first group – those that can’t recover – should be identified as soon as possible. Some may have taken the step to formally file bankruptcy, and one may have received notice of those proceedings. The amounts due should be separated from the regular accounts receivable (AR), either by establishing another AR account or writing them off. While it is unlikely that any recovery of the amounts outstanding will occur, one should file proofs of claim in the bankruptcy.

Others may not have filed bankruptcy but simply closed their doors. Refer those accounts to a collection attorney or firm that can determine if any assets remain or if there is any other means of recovery.

Members of the second group – those attempting to recover – may have also filed bankruptcy as a means of reorganizing under Chapter 11. The issues involved with continuing to accept business from a company in bankruptcy are too numerous to outline here, particularly if the bankruptcy occurred while the customer was running a schedule or had placed advertising to run in the future. Consult a competent bankruptcy attorney to fully understand one’s rights and obligations in that scenario. (Also see the “Retailers in Distress” article in TFM’s May/June 2019 edition.)

Most companies in the second group will not file bankruptcy but may need some form of reduction in the amounts they have outstanding. Identifying customers who genuinely require relief requires some investigation and ideally should involve confirmation in the form of financial information. At the very least, interviews via phone or in person should occur with the principals to confirm their financial plight.

If it becomes clear that a financial situation merits relief, negotiate a payment plan. Each customer may require different terms, depending on their unique financial circumstances. Most will also need to purchase additional advertising to attract new business. Part of the agreement to forego immediate payment of past-due amounts should stipulate that the client pay for new advertising within normal credit specifications. Any renegotiated plans should be confirmed in writing. A promissory note for the past-due amount spelling out the payment terms is ideal. At a minimum, however, a signed document acknowledging the past-due amount and payment terms is essential. Since payment of the past-due amounts will not come in as originally planned, they will impact cash flow projections. Consider establishing a separate AR account for these special agreements.

Customers in the third group – those who haven’t experienced disruption – should be required to pay within normal credit terms. Again, attempts to stretch payment due dates for this set of customers should be resisted as much as possible.

Finally, credit and sales must be on the same page regarding how these issues should be handled. Plans for resolving past-due amounts, negotiating payment plans and establishing terms for new business must be presented to the customer with one voice.

John Sloan is a former executive director of credit services for Turner Broadcasting System. He can be reached at john_sloan23@yahoo.com.