Dealing with Outstanding Commercial Invoices During the Covid-19 Pandemic

With most states issuing Stay at Home Orders for the past few months in light of the Covid-19 pandemic, many businesses have been forced to completely shut down or operate at a significantly reduced capacity. The life line of many, if not most businesses, directly correspond with its liquidity and cash flow. As business owners ourselves, we fully understand these issues. Some state or local governments have also set forth debt collection related moratoriums, or different levels of protections to give debtors some relief.

So how do you approach collecting on your outstanding invoices when the debtor is your reliable customer who has normally paid you promptly for the last decade – but now has fallen behind or stops paying completely?

Here are some general points to consider and keep in mind.

Work with Customer to pay down the account sum owed.

With a long standing and trustworthy customer that you would like to maintain a relationship with, and continue to do business with in the future – you probably do not want to send the unpaid invoices directly to collections, or take legal action without warning. This would likely leave a bad taste in their month, and can potentially destroy the relationship that you worked hard to cultivated and establish.

Instead, consider talking to the customer to understand the customer’s situation, and work with them to reach a reasonable solution to reduce sums owed to you. Let them know that you understand their situation, but that you are also in a similar situation.

If an acceptable payment plan can be reached, this could help your business by reducing the outstanding balance owed, and bring in a bit of some cash flow (versus none) from the customer’s account. You may want to consult with your attorney as to the terms of any payment plan, and how to properly memorialize the terms.

Additionally, if your customer rebounds later, your customer will likely remember your courtesy during this difficult time, and could potentially go a long way in fostering your business relationship.

Limit Additional Goods or Services to be Provided to the Debtor/Customer

Of course, no matter how good the customer is, you still have to look out for your own bottom line and limit your own business risk first. The common scenario is where a customer is unable to pay his creditor on an outstanding A/R, but requires additional goods or services from the same creditor in order to sustain their business and continue to survive.

The customer’s pitch is that if they can receive additional goods or services from you, then they can make a profit, and use that profit to pay you back on the already outstanding debt. Of course, this can quickly spiral out of control, with an initial unpaid invoice of $15,000 suddenly ballooning to $75,000 of invoices before you know it – with the customer not being in any position to better pay back the initial outstanding balance, or the new one.

Instead, while you work with the customer towards a resolution, consider limiting any new services or goods provided unless a certain portion of the outstanding sum is first paid down. Also consider keeping a comfortable limit as to how far you are willing to extend additional credit to the customer, or how much they would need to reduce their prior liabilities before you would consider providing additional services or goods to the customer. This way, you can be in control of the situation and manage your long term risk.

While attempting to informally resolve an unpaid invoice does not always work in every situation or with every customer, these are still prudent ideas to consider in light of the current pandemic and Court closures. Even if litigation is ultimately the only option, at you least you have the benefit of knowing that you explored other alternatives, and tried your best.

(Please note that the above is provided for informational purposes only, and should not be construed as legal advice on any subject matter, nor creates an attorney-client relationship between the Jen Law Firm and the reader. No reader, clients, or otherwise, should act or refrain from acting on the basis of any content included in the article without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from an attorney licensed in the reader’s state).