Slow pay is the first symptom, and it is information before it is a problem. A customer who has always paid in thirty days and now pays in fifty is telling you something about their own balance sheet, and you generally have thirty to ninety days of runway to act on it before anyone else does.
Most owners spend that runway making phone calls. Phone calls are fine. They are not leverage.
Leverage comes from documents signed before the trouble
Almost everything that protects a trSlow pay is the first symptom, and it is information before it is a problem. A customer who has always paid in thirty days and now pays in fifty is telling you something about their own balance sheet, and you generally have thirty to ninety days of runway to act on it before anyone else does.
Most owners spend that runway making phone calls. Phone calls are fine. They are not leverage.
Leverage comes from documents signed before the trouble
Almost everything that protects a trade creditor has to be in place before the account goes bad. After it goes bad, your options narrow to collection and litigation, which are slow, expensive, and often collect a fraction.
The credit application. Most companies use one to gather information and never ask it to do legal work. It can carry an interest rate on past-due balances, an attorney-fee provision, a venue clause naming your county, a waiver of the customer’s right to offset, and — most usefully — a personal guaranty from the principal. A guaranty from the owner of your customer changes the customer’s internal ordering of whom to pay when cash is short. That is precisely what you want it to do.
A security interest in what you sell. If you ship goods, you can take a purchase-money security interest in the specific inventory you deliver and file a UCC-1 financing statement. Done correctly and on time, a PMSI in inventory takes priority over the customer’s bank lender, which otherwise holds a blanket lien on everything. The timing and notice rules are strict — the filing and written notice to prior secured parties must be in place before the customer receives the goods — but the result is that you are secured rather than standing in line with everyone else.
Credit limits with teeth. A limit that nobody enforces is a number in a system. A limit tied to a contractual right to suspend shipment is a tool.
Tools you have while the account is still open
Adequate assurance. Under the Uniform Commercial Code as adopted in Indiana, when reasonable grounds for insecurity arise about the other side’s performance, you may demand in writing adequate assurance of due performance, and you may suspend your own performance for anything you have not already been paid for. If the customer fails to provide assurance within a reasonable time — not to exceed thirty days — that failure is treated as a repudiation of the contract.
This is a genuinely useful provision and it is underused. It converts “we’re worried about you” into a documented demand with a deadline and a consequence, without breaching your own contract by walking away. Reasonable grounds means something: a bounced check, a credit report change, industry rumor plus slow pay, a public default. Put the grounds in the letter.
Stopping delivery. Goods in transit can be stopped in some circumstances when you discover the buyer is insolvent. That right evaporates once the customer takes possession, so it is a matter of days.
Reclamation. If you delivered on credit to a customer who was insolvent at the time, a written demand for return of the goods within a short window — generally ten days under the UCC, extended to forty-five days after receipt in bankruptcy — can get the goods back. Short windows, strict writing requirement, and worth knowing before you need it.
Setoff. If you buy from the same company you sell to, what you owe them may be applied against what they owe you. Confirm the contract does not waive it, and be careful once a bankruptcy is filed.
The part nobody expects: getting paid can be undone
Here is the piece that surprises people most.
If a customer files bankruptcy, payments they made to you in the ninety days before the filing can be clawed back as preferences. You did nothing wrong. You were owed the money, you collected it, and the trustee can still demand it back so it can be shared with all creditors.
Two defenses matter in practice. First, the ordinary course defense: payments made on ordinary business terms, consistent with the history between you and that customer, are protected. The history is the point — which is why aggressively changing your terms with a struggling customer can strip the very protection you want. Demanding cash in advance from a customer who has paid net-30 for six years feels prudent and quietly creates preference exposure on everything they pay you in the run-up. Second, new value: goods or services you provided after receiving a payment offset the exposure. A supplier who keeps shipping is often better protected than one who cuts the customer off and collects the balance.
The practical lesson is that the instinct to tighten hard and collect fast on a wobbling customer can be the wrong instinct, and that the ninety days before a filing deserve a conversation with counsel rather than an improvisation.
Read this from the other side too
Most owners are on both ends of this. You are somebody’s customer, and in a tight quarter you are the one stretching.
What is worth knowing from that chair: the payment terms in your vendor agreements are contractual, and stretching them is a breach even when the vendor tolerates it. That breach can trip a cross-default in your credit agreement, can void warranty or support obligations, and can give the vendor a right to suspend on the exact week you need delivery. If you are going to stretch, the professional move is to say so and document a revised schedule, not to go quiet and hope. A vendor who agreed to sixty days will keep shipping. A vendor who discovers sixty days will not.
If you receive a demand for adequate assurance, do not ignore it. Silence for thirty days hands the other side a repudiation and the right to walk.
What to do this quarter
Pull your aging and identify every customer whose days-to-pay has moved more than ten days in the last two quarters. For each one, confirm three things: whether you have a signed credit application with a guaranty, whether your contract allows suspension, and how much exposure you would carry if they stopped paying tomorrow.
Then look at your credit application itself. Most were drafted a long time ago and ask for a bank reference and nothing else. Updating that one page is inexpensive, applies to every new account going forward, and is usually the single highest-return document in a trade business. Reviewing it alongside your customer contracts and vendor terms is the kind of thing a periodic business health check-up is built to surface.ade creditor has to be in place before the account goes bad. After it goes bad, your options narrow to collection and litigation, which are slow, expensive, and often collect a fraction.
The credit application. Most companies use one to gather information and never ask it to do legal work. It can carry an interest rate on past-due balances, an attorney-fee provision, a venue clause naming your county, a waiver of the customer’s right to offset, and — most usefully — a personal guaranty from the principal. A guaranty from the owner of your customer changes the customer’s internal ordering of whom to pay when cash is short. That is precisely what you want it to do.
A security interest in what you sell. If you ship goods, you can take a purchase-money security interest in the specific inventory you deliver and file a UCC-1 financing statement. Done correctly and on time, a PMSI in inventory takes priority over the customer’s bank lender, which otherwise holds a blanket lien on everything. The timing and notice rules are strict — the filing and written notice to prior secured parties must be in place before the customer receives the goods — but the result is that you are secured rather than standing in line with everyone else.
Credit limits with teeth. A limit that nobody enforces is a number in a system. A limit tied to a contractual right to suspend shipment is a tool.
Tools you have while the account is still open
Adequate assurance. Under the Uniform Commercial Code as adopted in Indiana, when reasonable grounds for insecurity arise about the other side’s performance, you may demand in writing adequate assurance of due performance, and you may suspend your own performance for anything you have not already been paid for. If the customer fails to provide assurance within a reasonable time — not to exceed thirty days — that failure is treated as a repudiation of the contract.
This is a genuinely useful provision and it is underused. It converts “we’re worried about you” into a documented demand with a deadline and a consequence, without breaching your own contract by walking away. Reasonable grounds means something: a bounced check, a credit report change, industry rumor plus slow pay, a public default. Put the grounds in the letter.
Stopping delivery. Goods in transit can be stopped in some circumstances when you discover the buyer is insolvent. That right evaporates once the customer takes possession, so it is a matter of days.
Reclamation. If you delivered on credit to a customer who was insolvent at the time, a written demand for return of the goods within a short window — generally ten days under the UCC, extended to forty-five days after receipt in bankruptcy — can get the goods back. Short windows, strict writing requirement, and worth knowing before you need it.
Setoff. If you buy from the same company you sell to, what you owe them may be applied against what they owe you. Confirm the contract does not waive it, and be careful once a bankruptcy is filed.
The part nobody expects: getting paid can be undone
Here is the piece that surprises people most.
If a customer files bankruptcy, payments they made to you in the ninety days before the filing can be clawed back as preferences. You did nothing wrong. You were owed the money, you collected it, and the trustee can still demand it back so it can be shared with all creditors.
Two defenses matter in practice. First, the ordinary course defense: payments made on ordinary business terms, consistent with the history between you and that customer, are protected. The history is the point — which is why aggressively changing your terms with a struggling customer can strip the very protection you want. Demanding cash in advance from a customer who has paid net-30 for six years feels prudent and quietly creates preference exposure on everything they pay you in the run-up. Second, new value: goods or services you provided after receiving a payment offset the exposure. A supplier who keeps shipping is often better protected than one who cuts the customer off and collects the balance.
The practical lesson is that the instinct to tighten hard and collect fast on a wobbling customer can be the wrong instinct, and that the ninety days before a filing deserve a conversation with counsel rather than an improvisation.
Read this from the other side too
Most owners are on both ends of this. You are somebody’s customer, and in a tight quarter you are the one stretching.
What is worth knowing from that chair: the payment terms in your vendor agreements are contractual, and stretching them is a breach even when the vendor tolerates it. That breach can trip a cross-default in your credit agreement, can void warranty or support obligations, and can give the vendor a right to suspend on the exact week you need delivery. If you are going to stretch, the professional move is to say so and document a revised schedule, not to go quiet and hope. A vendor who agreed to sixty days will keep shipping. A vendor who discovers sixty days will not.
If you receive a demand for adequate assurance, do not ignore it. Silence for thirty days hands the other side a repudiation and the right to walk.
What to do this quarter
Pull your aging and identify every customer whose days-to-pay has moved more than ten days in the last two quarters. For each one, confirm three things: whether you have a signed credit application with a guaranty, whether your contract allows suspension, and how much exposure you would carry if they stopped paying tomorrow.
Then look at your credit application itself. Most were drafted a long time ago and ask for a bank reference and nothing else. Updating that one page is inexpensive, applies to every new account going forward, and is usually the single highest-return document in a trade business. Reviewing it alongside your customer contracts and vendor terms is the kind of thing a periodic business health check-up is built to surface.
Mike Lang is a transactional lawyer who writes weekly for founders and family business owners navigating the deals that define their companies. Questions or topics you want covered?