By JAY GOLTZ
One of the more harrowing parts of running a business is learning the realities of selling on credit. I sell art and framing to businesses and institutions, and I am forced to extend credit to many of them. I say forced because no one in his right mind would give credit if he didn’t have to.
This kind of credit, known as trade credit, is unsecured credit, which means you are at the end of the line to get paid if your customer goes broke. That’s what makes this a particularly dangerous game to play. Most entrepreneurs have little or no experience overseeing an intelligent credit policy when they start their businesses. They learn quickly. In the beginning, it’s all about making sales. After a while you learn that it’s about making sales and getting paid.
Last year I made a large art sale to a local college. One of the pieces it ordered was a commissioned sculpture that cost $70,000. For reasons that were never clear to me, everything the college ordered was billed through a “marketing company” that contracted for the work and paid the bills. I had done business with the company before, and it had good credit. As is customary, I got a 50-percent deposit on the order. So far so good.
We finished the project and billed the company for the balance. We did not get paid at 30 days, and our collection efforts started. First, my receivables person started calling and got the usual stories. At 60 days, my chief financial officer took over and got a different standard response: “We have over $600,000 in receivables ourselves and people are paying us slowly. Don’t worry, you’ll get paid.”
At 90 days, as per our protocol, I took over. There is something special about getting a call from the chief executive to get a bill paid. I called the partner who had signed the credit application and who is also the marketing company’s chief financial officer. I got the same $600,000 story. I told him I would call back in two weeks if I didn’t get paid.
Many times I do get paid; this time I didn’t. I called back and got the $600,000 story again. “Wait a second,” I said, “I own a business. I get the slow receivable thing. But how could your receivables not have gone down in the two months since we have been calling? Someone must be paying. What’s the real story?”
I learned this interrogation technique from watching too many episodes of “NYPD Blue” and “Law and Order.” This is not a game for the timid. I got a confession. The chief financial officer told me that the company had changed its “business model” from printing to digital and that the new computer programs they had developed took longer to get to market than they had expected.
When you extend credit, you essentially go into business with your customers. Twenty years ago I would have gone along with the program of financing their new business model — only to find myself cut out of the will when the company died. But I had seen this movie before, and I had learned my lesson.
I told him he had two weeks to come up with the money, or I was giving the case to a lawyer. I did not get paid, so I gave it to a lawyer who specializes in business credit collection. The lawyer, Ira Helfgot, is president of the Illinois Creditors Bar Association. The end of the story is that Mr. Helfgot got a judgment against the company and a garnishment on its bank account. I got paid.
Part miracle, part good legal work, part knowing when to send in the dogs. Every situation is different, but from my experience, when an account goes beyond 120 days you’d better face the reality that statistically you are very likely holding a bad hand. I have lost hundreds of thousands of dollars in bad receivables. It is sometimes the cost of doing business. Other times, it is the cost of not doing business properly. I have done both.
Here’s what I’ve learned: Always get a signed credit application. Always check credit. Always establish credit limits. Always call when they are late. Always assume that you are going to have some losses.
Jay Goltz owns five small businesses in Chicago.
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