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:
You wrote about promissory notes recently. I have a concern about increasing the price of materials being bought now and using the difference to help pay off the note. This strikes me as being (and I hate to say this in today’s world) a form of collusion because you can expect the contractor will pass along the extra costs for those materials on to the end user. I am not sure how the laws in my state would look at that. Now if a company offered a plan to all its contractors that if the account is paid within 10 days, they would receive a 2% discount, that is a bit different.
Signed, Revisiting the Prom

Dear Prom Redux:

Thanks for the response. I appreciate your comments. I always enjoy another point of view and I love a spirited discussion based on that opposing view. I am a little perplexed by the collusion reference, however. Who am I colluding with? I am not getting together with a group of other vendors or distributors and price-fixing or setting up a bunch of unwritten rules for how delinquency will be handled by all moving forward.

A promissory note is one of many methods used to get a delinquent customer back on track and the creditor made whole. How it is structured, quite frankly, is between the creditor and the debtor. I am in favor of crafting any agreement that gets my company paid and is still legal. Whatever agreement that is stuck between the creditor and the debtor to resolve the debt is between them.

Now that we have gotten the collusion portion of the discussion out of the way, let’s tackle the next counterpoints.

1. Rebates: Here you’re offering the customer a percentage rebate on new purchases that will be applied to the old balance. Rebates can be monthly, quarterly, or however the creditor and debtor agree to set it up. The supplier (creditor) is taking less profit in order to help the debtor pay off the debt. It is also a way to “tie” the debtor to the creditor—if he is going to purchase products somewhere, I as the creditor carrying him should be able to get sales with some profit in them.

2. Increasing the customer’s price: The increase goes to the debtor’s old balance. This challenge with this method is someone has to keep track of it, make sure the pricing is correct, and then do the pain-in-the-hiney calculations to make sure the overage gets captured and applied the way it is supposed to be done.

3. Contractor (debtor in our scenario) passing the cost on to their customers: This is the leap you have taken. As a supplier, I have no way of knowing, nor do I want to or care, what my customer is charging that end-user customer. That is between them and whatever they agree. Frankly, maybe the contractor should look at increasing their pricing to customers. They may be underpricing in their market, and that is how they got into this mess in the first place.

4. Laws in your state: I don’t even know where to start.

I do like that you brought a solution to the table. Offering an across-the-board discount for payment in a certain number of days sounds like another day at the office. We offer a selection of terms, with or without discount, based on what we as a company have decided we would like to offer our customers. Offering a discount to everyone so one debtor can have the opportunity to catch up on his bill seems extreme. It feels like creating a participation trophy: Everyone gets something for showing up.

We all learned early on that life is not fair. If life were fair, creditors would not have to construct intricate deals to get paid for the product the debtor agreed to pay for but now can’t. Fair doesn’t mean equal. Equal means that everyone will be treated EXACTLY the same way. Fair doesn’t mean everyone gets the same deal.

What I can do as a creditor is work equally hard with each customer to help them be as successful as possible. Sometimes that may mean offering a solution that creates a mutually successful result for both of us. What one customer needs to be successful may not be what another needs.

Face it folks, we are selling building materials, not saving lives. Let’s not make it more complicated then it has to be. Trophy not included.