Accounts Payable

How To Restructure You Company’s Accounts Payable Debt

First, look at your suppliers and their respective accounts payable balances.  Then, schedule a meeting with those suppliers on an individual basis. The goal here is to encourage them to take their present debt and restructure it.  In addition, you want to convince them to continue extending credit to your business on an open account basis.  Suggest longer term especially if you are a large customer to your supplier.

Admittedly, supplier negotiations are never easy. They are complicated because your credit could be, for the most part, in jeopardy anyway.   However, do not assume that your suppliers will not go along with what you have in mind regarding your accounts payable.  You might be surprised. The important aspect of this exercise is simple.  If you do not ask, you will not receive.  Set high goals.  Any concession or additional terms you get may be better than what you have right now.   If your objective with a supplier is to have him keep you on open account, you might ask for extended terms.  He may refuse that request, but he may continue to sell to you on an open account basis as a compromise.  It’s all a negotiation.

Assume your business is seriously past due with a key supplier. You owe a major supplier a substantial amount of money that is 120 days old. The supplier is putting pressure on you for payment. You are not on COD, but he wants you to pay previous invoices before he will ship you any more product. What do you do?

The answer is that your debt with him must be restructured.  Here are some sugges­tions:

Ask your supplier’s sales representative to arrange a meeting at your place between you, the credit manager, and the general manager of your key supplier.  If the supplier is owned by someone who you have access to, then you only need to meet with the owner alone. At the meeting, show these people your operation and what you are doing to resolve your business problems. Talk about the cost-saving systems you are installing. Talk about the positive changes in your business. Talk about the future prospect of your business.  In other words, impress them that you are in control of things and are taking steps to remedy the situation.  After this, tell them that you need their help.  Ask for more than you expect to get.  You may be surprised.  But remember, whatever you get will be better than what you have.

So, just what kind of help should you be asking from this supplier? You could ask for extended  terms like to be moved from 30 to 60 days of credit.  If you have reached the cap of your credit line, ask for a higher line.  Or if he is planning on putting your business on COD (cash on delivery) or CIA (cash in advance), ask that this not be done.

Another tactic regarding your accounts payable is to ask your supplier to spread out the money you owe them on a promissory note paid monthly over time.  If they agree, you can take the old accounts payable and put that amount into a promissory note. Then, set up a payment schedule in equal monthly payments, preferably with no interest.  After this arrange­ment has been agreed upon, ask for the first payment to be delayed 30 days. They have gone this far; they might do it if you ask. Now you are current and not 120 days past due.

As last resort, you might want to take the approach of returning inventory in lieu of payment. This is a good way to restructure the debt if the inventory is slow-moving or obsolete. Remember, they sold it to you in the first place. They have a better opportunity for selling it than you might have.  Do not give back inventory that is fast moving. You will only have to go out and buy it again anyway. Returning inventory in lieu of paying accounts payable is a good strategy, because you can get it off your books at a cost close to what you originally paid.  However, you may have to pay a small restocking charge. The other alternative is to convert unwanted inventory by having a sale.

No matter what your arrangement, make sure that you continue your relationship with the supplier. The only time you should give up on a supplier is when he gives up on you.  When that happens, do not give him anything.  Wait until he turns you over to a collection agency or lawyer.  At that time, you can negotiate for terms, or the return of merchandise, or both. In most cases, you can usually get more flexibility from a lawyer or collection agency than you can get from the supplier in the first place.  Lawyers and collection agencies find negotiation a solution to conflict, whereas suppliers often do not.  Of course, once the matter goes that far, you will most likely never be able to buy from that supplier again; so, before burning your bridge, make sure you have other sources of supply.

Your bank loan and other business debts along with the associated payments can also be restructured.  You may even be delin­quent and getting pressure from your bank, finance company and lease company, but do not panic. They are generally more willing to negotiate than your suppliers are.  After all, they really do not want to foreclose on your loan and take back all your the equipment and fixtures.  There is a limited market for repossessed items, and they realize that hard assets sell for pennies on the dollar at auction, so they will negotiate.

A company had equipment leases at 18% interest, payable in seven years in the form of a balloon payment. The company got behind on the payments, and the leasing company threatened repossession. The company went to the leasing company and renegotiated the deal.  Here is what they got:  One year moratorium on any payments; reduced interest to 10%; and, extended amortization to 15 years.

Those negotiations netted the company some truly great conces­sions: A one year grace period with no payments; a reduction of payments from $120,000 per month to a little over $70,000 per month; a cash-flow savings of $50,000 per month, and the lease is paid in full instead of a balloon payment due in seven years.

Another organization had a fleet of leased autos and trucks. The leasing company was ready to repossess because the lease was seriously delinquent. The company renegotiated a deal where they got 50% of their fleet updated to new vehicles. They also received a considerable amount of cash from the accumulated equity, which they used to make the payments for the next three months.

Use these accounts payable strategies to restructure your accounts payable debt to both increase your cash flow and take the pressure off.  If you need help restructuring your businesses accounts payable, contact the Turnaround Group today.

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