Credit guru Thea Dudley has spent more than 30 years in LBM credit management. Now she's here to answer your credit and collection questions. Got a question for her mailbag? Contact Thea at [email protected]

Dear Thea:
So we have a customer that has consistently been in arrears pretty much since the day that I approved the account. This customer has been doing close to $2M with us annually and our general manager has suggested that we move the money he is behind on to a promissory note. I am not a fan of promissory notes, but this one is pretty unique. The manager suggests we move a considerable amount of the debt (that is well beyond 90 days) and just charge an extra percentage on any future materials, deduct the overage every quarter and put that money against the promissory note balance. Have you ever heard of doing this? What are the pitfalls?
Signed, PromiSORRY in Cleveland

Dear PromiSORRY;I have to give it to your GM, that is some creativity in action. Gold star to him! I have heard some fairly clever ways of moving debt around and attempting to work it down; yours is way up there in the top two.

COD+ (cash on delivery and fixed dollar amount or percentage of the sale), 2-for-1, rebates on all purchases with the rebate applied to the past due balance (calculation time frames vary, monthly, quarterly, twice yearly), application of payment of new purchases to the old invoices (otherwise known as “rolling”), you name it, some poor credit manager has tried it - willingly or unwillingly.

I am not a prom note fan either. Something always seems to go wrong. The customer believes they are getting short changed or that they have paid more than they actually have or my company is overcharging them.

I always stress out about the calculations. Who is responsible for tracking those? Previous experience has taught me that once the crisis has been dealt with, I am the one stuck with the work: tracking, pushing the rebates to be calculated and released on to the account. I'm the one making sure the COD goes out with the “extra” collected, whether it's application of rebates or additional money collected. Then I'm communicating to the customer how the rebates or funds were applied. We haven’t even touched on interest on this prom note.

This is a lot of extra work that no one EVER wants to hear about or deal with but someone has to; you will be the one with the mop and bucket cleaning it up until it is done. You become the de facto bookkeeper for your customer. No extra pay included.

The other side of this sad story: What are your options? They are pretty limited. Find a solution or add them to the lawsuit pile, which is really where this rubs me wrong. I am the one holding the debt and now I have to figure out how to solve it to get my company’s money. Where is the risk on the customer's side? If you can get your company’s money without it getting any uglier than it already is, that is a win.

The beauty of credit management: no one expects you to be the sunny side up! Any time I have to do a prom note to get an account caught up or paid off, regardless of how much they purchase, I want some form of security. I am assuming you are not asking for this security since you don't mention it in your letter.

A consent judgment, real property, rolling stock, or personal guarantee at the very least will get you to say, "What do you have, Mr. Customer, to secure the note?" My feeling is if I am uncomfortable (and yes, I am uncomfortable) the customer should be uncomfortable too. That is closer to fair - although your customer may not see it that way. Apparently, when you treat people the way they treat you they don’t like it. And yes, I want to and will charge interest. I too, am a business with bills to pay so I am going in to need collect that cost of carrying.

Where’s the trust, they ask? They had it. You trusted the FIRST time around on this account. You trusted that the customer would pay as agreed, the way you delivered the product: on time, without being reminded, and with your paperwork in order. So the “trust” as you both know it is gone. BUT, it can be restored to an acceptable level if they sign on the dotted line with some additional documents.

Be careful of people whose actions do not match their words. Telling me you want to pay me is one thing, putting action behind it is another.