It is not unusual for a customer with a good payment history to have short-term cash flow issues driving up past due balances. As a Credit Manager, you are on the front line to protect your company from losses. Equally important is to do whatever you can to enhance revenue opportunities. When a customer is seriously past due with a significant balance, a way to avoid third-party collection or legal action is to work with the customer and reconfigure the debt. This can be done through a Promissory Note.

By putting the customer on a payment plan it can help them re-establish the cash flow needed to continue operations. By restructuring the debt in this way, it can have four positive results.

1. 1. 1. You have an opportunity to collect more of the past due than by forcing a cash-strapped customer into collections.
      2. Shipments can continue to that customer. You can seek additional protections or limits to your exposure in ways that allow continued revenue and profit to flow into your company.
      3. You can combine a Promissory Note with other forms of risk mitigation guarantees and security.
      4. In the event the customer misses a milestone payment, you can take immediate action and, in some cases, require a “stipulated” court judgment as a term of the Promissory Note.
      5. If the customer ends up filing bankruptcy, you have protection from a “Normal Course of Business” violation Preference Claim. Since the debt has been changed into a payment plan, all past due balances are considered paid in the normal course of business if received per the terms of the Promissory Note.

What is a Promissory Note?

A promissory note is an agreement between a customer and your company documenting what is owed. It formalizes a payment plan from a start date over a defined period of time. There are differences based on a given state's laws and specific terms the customer and supplier agree to.

Important Elements in a Promissory Note

• • Details the parties to the note: Name, business address, etc.
  • The amount owed: This is particularly important. Once the customer acknowledges the amount owed, they will find it very difficult to dispute the amount in a litigation proceeding.
  • The date of the first payment, the dates subsequent payments are due, and the end date.
  • The amount of each payment.
  • The interest rate and how it is calculated: This will vary by Federal District, so you need to confirm the applicable highest legal rate.
  • An acceleration clause: If the customer misses a payment the remaining balance is due and payable in one lump sum.
  • A stipulated judgment: Consult with a qualified attorney to make sure it is legal in the applicable jurisdiction. This will allow you to go to court, make your claim with no need for a trial.
  • Appropriate Signatures: Make sure signatures of both the borrower and the lender are included on the promissory note. Consider having the customer's signature notarized.

Conclusion:

Promissory Notes may provide a number of advantages to both the customer and your company. You can help a struggling customer overcome short-term cash flow issues. Rather than lose a customer, with appropriate risk mitigation measures in place, you can continue business with them.

If things don't go as hoped, your company will have protection from a Preference Claim on amounts paid down within the terms of the note.

Remember, there are variations between legal jurisdictions, so as you construct a Promissory Note you may want to seek legal counsel to get it right.