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Practical methods to assure payment and increase collection of accounts receivable during COVID-19

David Kaufman Matt Hafter April 22, 2020

During this unprecedented pandemic and resulting economic decline, customers may increasingly be unable or unwilling to pay for the products or services they have purchased. Therefore, any business should think beyond customary protections to ensure payment for the products and services they sell. Below is a brief description of potential protective measures that a business may want to consider:

  • Audit current practices and documentation;

  • Implement a cash pay or deposit prior to delivery system;

  • Receive a payment guaranty;

  • Become a beneficiary of a letter of credit or other security; and

  • Obtain a security interest on shipped goods or other collateral.


Initially, businesses should carefully review their current form customer contracts and determine whether they need to be updated or otherwise modified to reflect the current economic climate. The terms of condition of sale, invoices, purchase order acknowledgements and other customer contracts may already include certain protections. These should be "state of the art" and reflect industry practice. However, form contracts should be periodically updated and can often be substantially improved with minimal time and effort.

Cash on or prior to delivery

Requiring customers to pay cash on delivery or to pre-pay before goods are shipped or services provided assures payment absolutely. In this situation, the transaction occurs essentially simultaneously, and there is no need for additional assurance of payment. This method may be effective in many situations. A vendor may also consider reengineering delivery to permit for partial or full prior payment. Even small payments can be made through one of the many payment portals (Venmo, Zelle or PayPal, for example.)

Payment guaranty

A payment guaranty may be obtained from a person or entity related to the customer, who has validated net worth or sufficient assets to assure payment of the customer's accounts receivable. In a payment guaranty, the guarantor (such as the general contractor) promises to pay the invoice if the customer (or subcontractor) is unable to do so. A well-constructed payment guaranty requires payment from the guarantor without having to institute a lawsuit or first exercising any of the other legal remedies against the customer.

Letter of credit or other security

With a letter of credit, the customer contracts with a financial institution (typically a bank), which provides a letter of credit to the vendor promising to pay in case the customer is unable or unwilling to do so, subject to certain limitations. While most banks have standard letters of credit forms, any beneficiary should carefully negotiate the specific terms of such letter to ensure that the conditions precedent to payment carefully fit the transaction.

Security interest

A security interest will typically provide that if a creditor is not paid, then, subject to certain procedures, it can seize and sell all or a portion of a debtor's assets (depending on what the security interest covers) to discharge the amounts owed by the debtor (the "debtor obligations"). State laws vary as to how to properly obtain and perfect a security interest, but it typically involves: (i) the debtor granting the creditor a security interest (this can be placed in the purchase order or another contract with the debtor) and (ii) filing a Uniform Commercial Code financing statement that properly describes the "collateral" securing payment of the debtor obligations with the Secretary of State in the state where the debtor is incorporated or otherwise organized. If the debtor already has one or more loans outstanding, documenting this new security interest may be more complex. Depending on the collateral covered by the security interest, additional steps may be required to properly perfect a creditor's security interest (e.g., possession of stock or member certificates and a control agreement with respect to accounts, etc.).
In addition to the foregoing, thoughtful businesses should include other traditional measures to increase the likelihood that the customer does not default. Traditional measures include:

  • Communicating with customers frequently about payment due dates and fees for late payment;

  • Evaluating the credentials of a new customer with a detailed credit check,

  • Obtaining trade references or bank references; and

  • Incentivizing customers to promptly pay via a discount.

Another important component of a collection strategy is to review and update the training provided to the individuals in the business who actually deal with customers. Topics would include dealing with the “battle of the forms,” what changes to the business’ standard forms – if any – are acceptable, basic guidelines on how to protect the enforceability of guaranties, how to respond to customer questions, when to elevate issues to higher management and the like. These individuals could benefit from a playbook that offers guidance for implementing the protections outlined here.

Any proactive collection strategy would use a tailored combination of many of these tactics. Given this evolving economic crisis, businesses should consider thinking beyond traditional protective measures to increase the collection of their accounts receivable. The first step should be to have legal counsel review existing customer contracts and determine where potential deficiencies lie. The next step should be to update those contracts and possibly implement one or more of the foregoing nontraditional protective measures to increase the probability of payment from customers.

This client advisory is one in a series that discusses proactive steps smart businesses may wish to explore given the current economic conditions.

For more info, please reach out the author of this article or your regular Thompson Coburn contact.

David Kaufman and Matt Hafter are partners in Thompson Coburn’s Corporate & Securities Practice group.

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