Magazine article Business Credit

Making Promissory Notes Work

Magazine article Business Credit

Making Promissory Notes Work

Article excerpt

In the credit and collections game there seems to be a lot of acrimony regarding the use of promissory notes. Credit managers don't like to offer them, customers don't like to sign them and many a CFO view them with such skepticism they force the controller to accrue note balances in the reserve for bad debt. That being said, in these tough times the promissory note can be an excellent instrument for reducing and/or eliminating loss and preserving a good account.

I've often heard hard-boiled credit managers say they don't want to be in the banking business. If the economic conditions were ideal and banks were more flexible, and if business managers made better decisions, it would be best for trade creditors to avoid taking on the role of banker. Simply not considering a promissory note based on an archaic principle of trade credit is short-sighted thinking and indicative of a poor attitude toward customers. A good, pragmatic credit manager will use any tool in his or her arsenal to get paid and or preserve a good account.

As credit professionals, we need to thank the customers that run into difficulty now and then. Consider how valuable you would be to your ownership if all the accounts paid well; you would be viewed as just another expense that could be eliminated to help the bottom line. In fact, your ownership would be remiss in their duties to keep you on board in the absence of marginal accounts. We should be looking at the delinquent customer as our friend because they're keeping us employed. Let's face it; we'd be swimming against the current if we only gave credit to perfect customers.

The delinquent customer, our friend, doesn't like to sign promissory notes for a variety of reasons. We incorporate language in them that make some of the customers think they need to have their legal counsel review the document before they sign. Sometimes--and too often--we hit the customer with unreasonable interest rates. In addition, some of us try to tie personal guaranties and motions for default judgments to the note. All this is too one sided and will usually cause the delinquent customer, your friend, to balk at the note instead of signing it.

We don't need to generate a note that a Harvard Law professor wrote.

"Simplify, simplify, simplify!" said Henry David Thoreau. A simply worded note with the specifications regarding interest and payment is all you need. It sends a psychological signal to the customer that you're trying to help them. When you send a complicated legal document to a customer, it makes them think you don't really trust them and no doubt makes them leery of you. …

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