Do Your Credit Terms Account for Coronavirus Driven Disruptions?
Client Alert
Since our last post on COVID-19 and force majeure earlier this month, the number of coronavirus cases has quintupled across the world, causing major disruptions to global shipping networks as governments imposed lockdowns on entire cities, regions, and countries. While transportation providers continue to move large shipments of goods by ocean, air, rail, and truck, many offices and retail locations have closed. Consequently, it may be time for transportation and logistics providers to revisit the credit terms offered to customers, particularly importers that handle goods sold at retail locations.
Coronavirus Disruptions for Importers and Retailers
Many companies in the transportation industry offer credit terms to shippers and importers based on business credit reports generated when they first became a customer and, in some cases, long-standing business relationships. While there is always a risk that a customer won’t pay, business credit checks and a history of timely payments allow transportation and logistics providers to mitigate that risk and others while offering competitive terms in the shipping industry.
Unfortunately, the coronavirus pandemic, as well as measures to contain it, have caused abrupt changes in consumer behavior, companies’ productivity, and in turn, companies’ financial solvency. According to The Wall Street Journal, “[a]bout half of [U.S.] states have imposed lockdown measures restricting gathering and social contact, disrupting the lives of more than 100 million people and suspending the operations of thousands of businesses.” The Wall Street Journal also reports that nearly 50,000 major retail stores and restaurants were closed as of March 25, 2020. Even as the White House and Senate are pushing for a $2 trillion emergency stimulus package, some experts have reported that the risk of bankruptcy and default for high-yield companies doubled over the past several weeks. For transportation providers, this means that some customers may not be able to pay shipping costs pursuant to the agreed credit terms. Although carriers should have contractual language permitting them to exercise liens on goods in their possession, and auction them as a last resort, this can be an expensive proposition with unreliable returns.
Review and Update Your Credit Terms
The first questions are whether your company offers credit terms to shipping customers and, if so, whether that is reflected in a contractual agreement. If it is not subject to an agreement, you may simply wish to cease offering these credit terms for the near future unless you have good reason to believe the customer will be able to pay if the coronavirus lockdowns continue.
If those credit terms are reflected in a credit agreement, you should review the agreement and determine whether you have the contractual right to discontinue providing service on credit and whether there are limitations on your rights in that regard. Again, if you do have the right to terminate your offers to provide a service on credit, you should determine whether you are in a position to offer credit and whether the customer poses a safe credit risk in today’s environment. The same considerations should apply if a new customer asks for credit terms.
As you are probably aware, you may be assuming obligations to other carriers and transportation providers in the event that your customer proves insolvent. Thus, even if a small number of your customers begin to default, the cascading costs of demurrage, detention, warehousing, and collection can accumulate quickly, impacting your company’s liquidity.
Transportation and logistics providers continue to move needed goods (including emergency medical supplies) during these challenging times, and it is important that they insulate themselves as much as possible from the coronavirus’s effect on shippers and importers.
If you have any questions about credit terms or issues of non-payment related to the coronavirus, please contact Brendan Collins (bcollins@gkglaw.com; 202.342.6793) or Oliver M. Krischik (okrischik@gkglaw.com; 202.342.5266).
