October 19, 2023

The term “ghosting” is commonly used in the dating world to describe a person who stops responding to calls or texts suddenly and without explanation. But credit professionals also can be victims of ghosting from customers.

A customer can start dodging communication from you for a variety of reasons—even if you think the business relationship was going great. One day, your calls may not be picked up as frequently, your emails start to bounce back or get completely ignored, and your customer becomes distant. The feeling of horror takes over and you come to the sudden realization that your customer is indeed ghosting you.

Luckily, credit professionals can still be ghostbusters. Some customers may do the slow disappearing act, while others may disappear immediately with no warning. In either instance, taking a proactive approach to Know Your Customer (KYC) practices with both new and existing customers can help you stay prepared. “In our department, we do a lot of front-end work in order to help mitigate any risk,” said Brendon Misik, CCE, CICP, senior manager of credit at Nutrien (Deerfield, IL). “We do the work of regular reviews on customers, pulling credit reports and taking note of any patterns trending towards negative cashflow, not having the ability to pay and overall financial difficulties.”

One early warning sign that a customer is about to cut off contact completely is if you call your customer and they screen your calls, which means they let the call go straight to voicemail. “Nine times out of ten, if your customer is screening calls, they are doing that with all phone calls, not just yours,” said Kevin Stinner, CCE, CCRA, credit manager at J.R. Simplot Company (Loveland, CO). “It’s a red flag that they have multiple creditors contacting them and you’re not the only one they’re avoiding.”

Customer ghosting can happen at any moment, and it is key to identify the exact reason a customer vanished to solve the problem. For example, did a natural disaster impact your customer’s ability to contact you? Or are they about to file for bankruptcy? You would want to approach both situations differently, said Joseph Lange, CCE, ICCE, CCRA, senior credit manager at Brenntag North America, Inc. (Wauwatosa, WI). “You can look for those negative trends and differences in resources such as credit reports, where you can see what the customer’s patterns are like month-over-month,” Lange explained. “We’ll be able to see that pattern not just for us, but for others. There's a difference between the customer not answering you exclusively and the customer not answering everyone else.”

Some credit professionals may conduct in-person visits, while others may go straight to collections. However, it is best to try multiple tactics before giving in to any losses. Getting your sales team involved is one strategy to get a customer to return your calls. In some cases, your sales team may have a better relationship with the customer, making the customer more open and receptive. “Someone from the company needs to do a touchpoint if you are not physically able to be out there,” said Stinner. “But it’s a lot harder to ignore somebody when they’re knocking on your door versus when they’re calling or emailing you.”

Open and effective communication with your customer is key and can give your customer more comfortability to open up about any financial concerns. Approaching the situation in a non-confrontational manner and working closely with a customer about any possible concerns can make a customer feel less scared to tell you what is going on. Some credit departments offer grace periods, payment negotiations and even automated reminders. It is important to exhaust all possible options before escalating to collections.

Another common strategy credit professionals can use is calling from a different phone number that is not within the normal area code the customer is used to seeing. You can also try calling their customer service number for the person you are trying to reach and get connected with them. If all strategies are exhausted and a customer is still unresponsive, a more assertive approach should be taken.

“I always think of the old saying, ‘the squeaky wheel gets the grease,’ and it is 100% true,” said Stinner. “If you are persistent with a customer, eventually they’ll do something about your debt just to make you go away. Whereas, if you follow up every other week on the same day at the same time, they’ll know when the call is coming and get used to ignoring you. Don’t limit your communication to phone calls only. You can contact them through emails, text messages or even change it up and send letters.”

Most credit applications will have your customer’s direct contact information to their company office. If not, using Google to find their office number can also help you contact a secretary who can transfer your direct call to the customer. “Beyond tracking down customers to communicate, if they are still radio silent, I like to reach out to industry credit groups,” said Misik. “You can reach out to your industry credit group to see if they are ghosting others out there or you can get a contact with someone who’s in contact with the customer in order to get in touch.”

To learn more about strategies for dealing with a customer who ghosts you, listen to the latest episode of NACM’s Extra Credit podcast.

Many credit professionals spend a lot of time trying to resolve customer disputes, and disputes tend to become more common during times of economic volatility as a way for customers to stretch payment terms. Disputes end in the customer’s favor more than 75% of the time for one in every four credit professionals, according to an eNews poll. One in every five credit professionals say more than 5% of their past dues are tied up in disputes. The disputes factor in NACM’s Credit Managers’ Index fell 2.5 points to 47.3 in September, its lowest level since April of 2009.

Customer disputes, a common occurrence in the realm of business and commerce, arise when customers express disagreements, concerns or dissatisfaction regarding products, services or interactions with a company. By identifying and promptly resolving customer disputes, credit professionals can not only minimize risk, but they can also protect the reputation of their company and improve customer relationships.   

Billing or Invoicing Discrepancies

Customer billing portals can give rise to customer disputes over billing quality due to data entry errors, system glitches, complex pricing structures and delayed updates. Differences in the invoiced amounts, payment terms or billing quality issues can lead to customer disputes. This includes dilution, the difference between the face amount of an invoice or group of invoices and what the customer or account debtor actually pays.

“I've got some customers who regardless, I know every invoice is going to be an issue,” said Mary Lou Schwartz, credit manager at Ferguson Enterprises LLC (Metairie, LA). “So, I reach out on a regular basis when a payment is coming due and ask if there are any issues. If I don't hear anything from them, I call back or reach out in a week or two later. They may call back and say that the washer and dryer are not leveled and use that as an excuse to make a dispute on an invoice.”

Credit Card Disputes

Credit card payments are becoming more common in B2B trade, which means credit professionals must understand the risk that accompanies different payment methods. A recent eNews poll revealed that 59% of credit professionals have experienced a customer fraudulently dispute a credit card charge. This is also known as friendly fraud or a chargeback fraud, when a cardholder identifies a purchase on their transaction statement as fraudulent and disputes it sparking the chargeback process.

Pricing Issues

A pricing issue can turn into a dispute when a customer disagrees with the price they are being charged for a product of service. This can be due to incorrect pricing, hidden fees, contractual disagreements, billing errors or price changes.

“Now that prices are coming down from being so high before, it is squeezing margins on our wholesale and distribution customers unless they’ve locked in prices or have received prepay dollars from their retail and farmer customers,” one credit manager said. “So, customers who pick up their product later than requested or receive late deliveries will try to argue that prices have lowered since the time they placed the order.”

Defective Work or Materials

If there are issues with the quality of work or damage to materials provided, it can result in disputes over whether payment should be reduced or withheld. For Schwartz, most customer disputes are a result of damage to the homeowners’ properties during installation, such as scratched floors or countertops. “I keep telling people to just unbox them and let the builder install the products or material,” she said. “But sometimes, they reach out to us, and we hire people who install for them. Most of the time, people are finding excuses to not pay.”

Tax Exemptions

Customer disputes can arise in situations where individuals or businesses believe they are eligible for a tax exemption but encounter challenges with tax authorities or financial institutions. In such cases, the dispute revolves around the interpretation and application of tax laws and regulations rather than the tax exemption itself. Norman Cowie, CCE, director of credit at Paramont-EO, Inc. (Woodridge, IL) is in the construction industry, which deals closely with customer disputes regarding tax exemptions. “They could be doing a job for a month or two and we're billing them tax and then present a tax-exempt certificate to deduct tax from maybe 30 invoices,” he said. “These could be disputes or they could deduct the tax before they get the tax certificate, knowing that they're going to be getting credited for that, but they don't want to pay the tax. So, they deduct it from us and then once we get their certificate, we take care of all the deductions.”

A lot of Cowie’s customers work on public or federal projects where the organizations are typically exempt from tax. But that creates issues because some customers who buy material may also buy tools. “The material itself, like the lighting or gear would be exempt from tax, but the tools that they buy, they're not leaving it at the site, so they would have to pay tool tax on that.”

Delivery or Shipment Issues

Supply chain challenges were at their height during the COVID-19 pandemic, but shipping issues still exist amid war, natural disasters and labor shortages. “Customer disputes are largely driven by material lead times and supplier payment terms, which may be outside of their standard contract or project schedule,” said Sheryl Rasmusson, CCE, president at Kilgore TEC Products Inc. (Spokane, WA). “We are seeing more pressure to obtain materials timelier, but disputes seem to lie with the general contractor (GC) and the owner’s representatives. We believe these disputes are the result of increased project costs and interest rates, resulting in owner’s trying to save as much as possible.”

Resolving Customer Disputes

The key to resolving disputes quickly and effectively is to identify them early on rather than letting them sit. “If a dispute arises, we immediately make a plan to meet in person with management to address concerns and provide documentation supporting our stance,” Rasmusson shared. “Clear, concise communication will provide the customer with the reassurance that our company will meet their expectations and it makes it easier to adjust to unforeseen circumstances with suppliers.”

Try not to have a customer explain the dispute more than once because that hurts customer satisfaction. Working with the sales department to verify information not only prevents customer disputes but it improves the customer’s experience. “We send large invoices to our salespeople before they're due and ask them to contact the customer first about their satisfaction of the product, if they received it on time and if it is what they asked for according to size, color or quantity,” Cowie said.

Cowie also sends a weekly dispute list to his sales team, which includes the original price for the material, the amount paid, the balance due and any internal notes about the dispute. “If we're looking for a tax certificate for a certain job or there's a problem due to defective material, the salespeople can now try to resolve it while they're out with the customers,” he said. “Making sure we get job information on all invoices for all customers helps both in securing lien rights and in the case a customer deducts tax on a job.”

To decrease the number of disputes, credit professionals must be thorough when documenting information. Rasmusson’s company makes sure that each project document clearly identifies the requirements for lead times for shop drawings, submittals, product and payment terms. “This means no surprises or disputes as we work to be a successful part of the project. If lead times change, we contact our customer immediately to disclose the changes.”

For the past several years, a number of Chapter 11 debtors, typically with significant mass tort exposure, have used a bankruptcy strategy known as the “Texas Two-Step” to resolve mass tort liability in a bankruptcy forum while shielding their operating businesses from the direct impact of bankruptcy.

The name “Texas Two-Step” arises from a unique aspect of Texas corporate law: the divisional merger. “There's a Texas state corporate law known as a divisional merger, which allows a company to split itself into two or more entities, one of which keeps the valuable, profitable business, while the second company is given all the liabilities related to mass tort asbestos claims and litigation,” said Bruce Nathan, partner in the Bankruptcy and Restructuring Department of Lowenstein Sandler LLP (New York, NY).

In some cases, a funding agreement or corporate guarantee serves as the mechanism for the company with the mass tort liabilities to pay claims. “But the company that was left with the mass tort liabilities files a Chapter 11 bankruptcy to try to settle these claims through a collective bankruptcy process rather than having them go piecemeal through the tort system,” Nathan said.

Not all Texas Two-Step debtors start out as Texas entities, said Andrew Behlmann, also a Lowenstein Sandler partner (Roseland, NJ). “You may have a Delaware corporation, for instance, that wants to undergo a divisive merger,” he said. “Interestingly, Delaware is the only other state that has a divisive merger statute, but it is very rarely used, and it is almost never used in the two-step bankruptcy context.”

That leads to the “Texas Two-and-a-Half Step,” Behlmann explained, in which a non-Texas entity first merges into a newly created Texas entity. “Now you have a Texas entity that can go through a divisive merger and proceed down the Texas Two-Step path.”  A non-Texas entity cannot directly undertake a divisive merger under Texas law.

Is the Texas Two-Step a Bad Faith Filing?

Critics have alleged that the strategy was intended to obtain a discount on mass tort claims or to delay plaintiffs’ day in court. Supporters of the strategy maintain that it facilitates the orderly resolution of claims—typically numbering in the thousands—while simultaneously preventing bankruptcy from directly disrupting the operating businesses that typically fund the process. Although claimants and their counsel have supported the bankruptcies of solvent companies in the past, “recent filings have attempted to minimize the burdens of bankruptcy and the significant control that claimants often have in that process,” reads a Kennedys’ article. “Claimants and their attorneys have cried foul.”

Just because the Texas Business Corporation statute permits the Texas Two-Step does not mean that bankruptcy courts will automatically allow a bankruptcy filing where the company with the assets is not part of the bankruptcy, said Jason Torf, Esq., partner at Tucker Ellis LLP (Chicago, IL). “Often, tort claimants object first to the motion by the debtors to extend the automatic stay to the company with the assets that's not in bankruptcy,” he said. “You'll also see these tort claimants file a motion to dismiss the bankruptcy case as a bad faith filing and so far, those efforts by tort claimants have largely succeeded.”

One contested case is the dismissal of the LTL Management LLC Chapter 11 case. Johnson & Johnson Consumer Products (JJCP) followed the Texas Two-Step playbook, allocating its mass tort liability to a new entity, LTL Management LLC. According to tort claimants’ counsel, LTL has attempted to use the Texas Two-Step maneuver to enable J&J to evade accountability for thousands of cancer cases allegedly caused by its talc-based products. In a September Senate Judiciary Committee hearing, U.S. Senate Majority Whip Dick Durbin (D-IL), Chair of the Senate Judiciary Committee, questioned Dr. Erik Hass, J&J Worldwide Vice President of Litigation, and accused J&J of manipulation of bankruptcy. “You’ve dismissed the claims against you for possible asbestos in your product calling them meritless, junk-science one-off and beyond that and yet you put a valuation through LTL of $8.9 billion in these claims,” Durbin said. “How can you have it both ways...Luckily, at one or two different levels, the court has said that this is a sham—this is a maneuver that is not anticipated by the bankruptcy code.”

The U.S. Third Circuit Court of Appeals directed dismissal of LTL’s first Chapter 11 case.  According to an article from Fierce Pharma, the Third Circuit ruling “prevents J&J from funneling approximately 40,000 lawsuits into its newly created subsidiary, LTL Management LLC, and declaring it bankrupt, a ploy that could save the company billions.” As of Tuesday, Johnson & Johnson is weighing a third attempt to use bankruptcy for an $8.9 billion settlement of tens of thousands of lawsuits that allege tainted talc in the company’s baby powder caused cancer, Bloomberg reported.

How Does the Texas Two-Step Affect Trade Creditors?

Hopefully, not at all. Most trade creditors aren’t aware that their customer is using the Texas Two-Step strategy until the entity with mass tort liabilities goes into bankruptcy. Even then, many Texas Two-Step debtors leave trade liabilities where they belong—with the operating business. Typically, in a case where you're dealing with mass tort liability, the end goal is to obtain approval of a third-party release coupled with a channeling injunction that funnels those claims to a trust or otherwise, not to impair trade creditors, Behlmann said.

“Tort claimants are going to be the ones to really take the lead in doing this,” Torf said. “They can object to any motion by the debtors to extend the automatic stay to the entity with all the assets because that’s where the ability to recover is. But to recover claims from the entity with liabilities is through a funding arrangement with the entity with the assets. In the event trade liabilities are allocated to the debtor entity that inherits the predecessor company's mass tort liabilities, trade creditors might consider joining forces with tort claimants in seeking dismissal or other relief.”

Rarely would you see trade creditors as creditors of the company with the mass tort liabilities, Nathan said. “Fortunately, there have been cases where they try to make sure that a Creditor’s Committee is formed to represent the interest of all creditors, including the trade,” he explained. “Usually, the tort claimants in these cases get their own tort claimants committee.”

Contracts are the foundation of construction projects. They provide written documentation of what the scope of the work will be, terms, budget, obligations and more. It is imperative to thoroughly read the terms you will be agreeing to before signing any contract at all.

Certain provisions, such as flow-down may legally bind the subcontractor and/or materials suppliers to the general contractor in the same way the general contractor is bound to the project owner. Under this provision, the owner can also push the insurance element (indemnity) down to the general contractor. So, for example, if a person gets hurt or property is damaged, the general contractor can transfer indemnity for insurance purposes down to the subcontractor. The subcontractor may then try to transfer it down to the material supplier and so forth.

A flow-down clause could be as simple as a pay-if-paid or a pay-when-paid clause, explained Chris Ring of NACM’s Secured Transaction Services. “If either clause happens between the owner and the general contractor, there could be a flow-down clause that transfers down to the subcontractor and the material supplier,” Ring said. “Anyone involved in the project may be subject to this contract language. Somewhere in the language of a contract, there may be a transfer of indemnity or some kind of risk from one party to another.”

Construction flow-down clauses are a risk-shifting tool for general contractors and subcontractors. The clauses are essential in establishing all rights, duties and obligations of each party. And in some cases, subcontractors may accept a flow-down provision without reviewing the contract in its entirety, skipping over any potential liabilities included. Material suppliers should also take precautions to make sure none of the flow-down clauses are incorporated into the terms and conditions of sale for their goods. “Savvy subcontractors will often use a similar flow-down provision in purchase orders issued to their material suppliers,” said Christopher Ng, managing partner at Gibbs Giden Locher Turner Senet & Wittbrodt LLP (Los Angeles, CA). “In fact, credit professionals, financial executives and other risk managers for material suppliers should consider flow-down language to be just as important as a customer’s indemnity, warranty and payment terms.”

One of the first steps in taking precautionary measures is to identify the flow-down clauses presented in the contract itself. Because flow-down clauses can come in a variety of forms and substance, it is common for additional terms and provisions to be included in other documents as well. However, if a flow-down provision appears in a purchase order, a copy of the documents from where the obligations originated from should be requested.

“The biggest overarching concern is that you, as the supplier or person signing the subcontract, are now accepting terms in a contract that you’ve never seen before,” said Michael Murray, Esq., associate attorney at Lanak & Hanna, P.C. (Orange, CA). “You’re stepping outside of your credit terms and you’re instead signing the contractor’s subcontract. And that subcontract has a provision, which means you now take on the responsibility without knowing.”

Before signing the contract, it is possible to object and propose alternative terms or not complete the transaction until an agreement is made between both parties. For example, clauses dealing with termination, dispute resolution, warranties and risk of loss.  

“The extent to which you can avoid signing subcontracts and forcing customers to be bound by your terms and conditions is always better,” Murray said. “Our credit applications and terms and conditions in the credit world are catered to be favorable to us as the credit seller and when you are accepting the subcontract, that subcontract is generally tailored to benefit the customer and contractor.”