The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale Scott E. Blakeley, Esq. Jerry Bailey Executive Sales & Education Services Larry Durrant Manager, Order to Cash Americas Service Team

2 The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale April rd Party Backstops Letter of Credit Credit Insurance Factoring Guaranty Credit Card Debtor’s Assets as Backstops Certificate of Deposit Junior Security Interest Restructuring Agreement Vendor’s Assets as Backstops Purchase Money Security Interest Consignment Stopping Goods in Transit Reclamation Offset

3 The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale Introduction  Bankruptcy Concerns Preference claims Fraudulent conveyance claims Turnover Actions Strong-arm powers  Bankruptcy Risk  Automatic Stay April 2015

4 The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale Credit Enhancements  Letters of Credit Types  Standby – Only drawn on in the event the buyer doesn’t pay.  Documentary – Always drawn on. Generally used in for the international sales. April 2015

5 The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale  Letters of Credit (cont.) Advantages  Gives the buyer the opportunity to establish a credit history  Uses the bank as a fallback in case the buyer doesn’t pay  If the expiration is far enough out (or extended), additional time can be granted for payment  Can be drawn on even after bankruptcy  Drawings generally not considered a preference  Assures payment whether or not the goods conform to the contract  Cost Disadvantages  Cost  Documents must conform  Administrative burden April 2015

6 The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale  Letters of Credit (cont.) Tips  Allow time for late payment, shipping or manufacturing delays, etc.  Better yet, allow for an extension at seller’s request  Examine terms and conditions carefully, particularly the beneficiary’s name  Preferably the letter of credit requires only an invoice, a sight draft, and a statement that the invoice is past-due for a drawing  Allow for partial drawings. April 2015

7 The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale Article 1: General Provisions Article 2: Sales Article 2A: Leases Article 3: Negotiable Instruments Article 4: Bank Deposits and Collections Article 4A: Funds Transfers April 2015

8 The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale Article 5: Letters of Credit Article 6: Bulk Transfers Article 7: Warehouse Receipts, Bills of Lading Article 8: Investment Securities Article 9: Secured Transactions April 2015

9 The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale Blanket, or Basic Purchase Money Security Interest April 2015

10 The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale Priority in UCC Filings  Claims are paid based on where they are situated on the claims priority ladder April 2015 Secured Creditors Administrative Priority Claims Lower Level Priority Claims Pre-petition Unsecured Creditors

11 The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale Equipment vs. Inventory  Is your customer reselling or using your products in their business? April 2015 INVENTORY (GOODS)EQUIPMENT Customer resells the goods to another entity Customer uses the goods in the course of their business SearchContract Notify20-day Rule

12 The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale Two Required Elements April Security Agreement 2. Financing Statement or UCC-1

13 The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale Perfecting Consignment April Consignment Agreement 2. Financing Statement or UCC-1 3. Search and Notify

14 The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale Mechanic’s Lien Filing Process: Three Steps April 2015 Notice Lien Foreclosure XX days from first furnishing XX days from last furnishing XXX months / year from lien filing

15 The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale Certificate of Deposit Guaranty: Personal and Corporate April 2015

16 The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale  Credit Insurance Considerations  All accounts or select accounts  Type of policy  Deductible, annual limit April 2015

17 The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale  Credit Insurance (cont.) Advantages  Can improve seller’s bank financing  Allows an unbiased third party to review your credit portfolio  Can help to increase sales  Premiums are tax deductible  No bankruptcy risk  No relief from automatic stay required Disadvantages  Cost  Perception that credit insurer replaces the credit department  Preference risk April 2015

18 The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale Put Option/Put Contract Factoring Maximizing Recovery Where There is No Credit Enhancement  Credit Applications April 2015

19 The High Credit Risk Customer and Credit Terms: Using Credit Enhancements to Make the Sale Restructuring Agreement Stopping Goods in Transit Reclamation Offset (Setoff) Alternative Payment Methods  Credit Card April 2015

20 April 2015

21 April 2015

22 April 2015

23 April 2015

24 April 2015