One way a company can manage its cash when it doesn’t actually have much to manage is to draw out payment terms – with or without letting its suppliers know what’s going on. If your company is on the other end, it essentially becomes a lender to these suppliers.

This scenario has been playing out more frequently in recent months, given that many traditional financing sources have been dry as the Sahara. “Companies that otherwise would have strong balance sheets are having difficulty getting financing for operations, so they’re pushing more heavily on key suppliers,” says Scott Blakeley, an attorney with Blakeley & Blakeley LLP, a Newport Beach, Cal., a law firm focusing on creditors’ rights.

When this happens, treasurers often get caught in the middle. Sales may want to accommodate the customer and maintain the relationship. After all, in today’s business environment, replacing a client – even one that’s taking its time paying its bills – is far from a sure thing. In addition, if your two firms have been doing business together for a while, taking a hard line can come across as needlessly severe. Still, you don’t want to put your own firm in a position where it’s throwing good money after bad.

A couple steps are key to avoiding that:

a) Honestly assess whether the customer is one you want to continue working with, Blakeley says. If you meet their terms, will they continue to buy from you? Or, is it likely they’re already hunting for a substitute vendor and will drop you as soon as they’ve got one in hand?

b) Get some info. Making an intelligent decision probably will require digging a little deeper into the company’s financial situation than you’ve had to do in the past. That may mean working with sales to ask for their current financial statements. If your customer balks, you can politely point out that you’re now acting as a lender as well as a supplier, and need the same sort of info the firm normally provides its bankers.

c) Still not enough? If you’re uncomfortable with the numbers the firm has handed over, you can request some extra assurance of payment, such as a personal guarantee from the owner or a cross-guarantee with other companies under the same corporate umbrella.

d) Based on this info, assess the likelihood that you’ll get what you need from continuing the business relationship.

There’s one other thing to keep in mind, Blakeley says: With most customers, you probably work on one purchase order at a time. That is, you don’t have a contractual obligation to provide products or services on an ongoing basis.

That can prove less than ideal if the customer ends up filing for bankruptcy and is purchased by another firm. “There’s no requirement on an invoice-by-invoice basis that the buyer of the assets pay these claims,” Blakeley says. However, if you were selling under a supply contract and another company assumed the assets, including supply contracts, it would have to pay off the pre-bankruptcy debt.

What’s more, any payments you received within the 90 days before the bankruptcy filing for sales that were done on an invoice-by-invoice basis could be subject to a “clawback” provision. That means you could end up having to return the money to the customer during the bankruptcy proceedings. (While this seems like a quirk in bankruptcy law, it’s designed to prevent companies from siphoning off money to, for instance, their spouses right before filing bankruptcy. Unfortunately, innocent parties can get hammered by a clawback, as well.) On the other hand, if you received payment under the terms of a supply contract, the courts are less likely to see the payment as preferential, which makes it less vulnerable to clawback provisions.

In assessing customers that have slacked off on their payment schedule, your goal is to honestly evaluate their credit profile, while also anticipating just how your firm might be impacted if things head south. In some cases, you can improve the likelihood of collecting what you’re owed by the way you structure the sale. ###