Billionaire Ray Dalio: Don't take on debt until you've asked yourself this question

Thu, 25 Oct 2018

Many young people are deep in debt: Millennials between the ages of 25 and 34 have an average of $42,000 of debt per person and members of Gen Z (ages 16 to 20) already have an average debt of $4,343. And as interest rates rise, that debt is often becoming more expensive to pay off.

Billionaire investor Ray Dalio, the founder of the world's largest hedge fund, Bridgewater Associates, advises young people to do a bit of analysis before they agree to take out a loan.

"Be very careful about debt," Dalio tells CNBC Make It. "Some is good and some is bad."

When it comes to borrowing money you'll have to pay back at a higher cost — anything from credit card debt to student loans to home mortgages and auto loans — Dalio suggests asking yourself one question: Will the debt help you save or earn more money in the future?

"Debt that produces more cash flow than it costs is good," Dalio says. For example, taking a loan to complete an advanced degree that will raise your salary above the cost of the loan's monthly payments and interest is a good form of debt, according to Dalio.

Another type of good debt is the kind that forces you to save money over time. For example, monthly payments on a home mortgage are a type of forced savings, he says, because you are socking away money into an asset you can later sell.

Since Americans often struggle to save (the personal savings rate has hovered around 6.6 percent in the U.S. since June) forced savings can be an important mechanism for Americans to store wealth without being tempted to spend it.

"Debt that creates forced savings, which is greater than you would save if you didn't have it, like buying a house, will produce good debt," Dalio explains.

Unlike taking on debt to earn more or to save more, getting a loan to buy something that won't help you in the future is a bad idea.

"Debt for consumption, or for anything that doesn't produce more income than it costs, is bad debt," Dalio says.

Racking up credit card debt by shopping for clothes or dining out and not paying off the balance at the end of the month is an example of bad debt. The average interest rate on credit cards is close to 17 percent, and consumers spent over $100 billion on credit card interest payments and fees in the last year, according to data from Magnify Money.

As a rule, Dalio prefers to avoid taking on debt whenever he can.

"I'm personally very debt and risk averse — probably too much so," he says. "That's probably because my dad lived through the Great Depression and war and he impressed upon me the freedom from worry one gets from having savings and no debt."

Dalio is worth an estimated $18 billion, according to Forbes, and founded Bridgewater Associates in his two-bedroom apartment in New York in 1975. From its founding through 2017, Bridgewater returned the biggest cumulative net profit for a hedge fund ever, according to data from LCH Investments.

"I never had significant personal debt, and I built Bridgewater without borrowing a dime or raising a dime from outside equity, and I made sure it has significant savings," Dalio says. "Besides having peace of mind, it gave me the power of knowing that I could never be knocked out of the game."



https://www.cnbc.com/2018/10/23/ray-dalio-ask-yourself-this-question-before-taking-on-debt.html

How to avoid bad investments?

Picking winning shares is something every investor naturally wants to do.

However, success in investing is just as much about avoiding bad investments and minimising the risks that you take with your money.

Investors spend too much time thinking about how much money they can potentially make from owning a share and not enough time thinking about how much money they could lose if things go wrong.

Avoiding bad investments is important because they are hard to recover from.  If you lose 50% of your money invested, you need to find an investment that will double in value just to get the value of your portfolio back to where it started.

The more bad investment you can avoid, the better your long-term investment performance is likely to be.



How do you stay away from bad investments?


1.   The first thing to do is to focus your investments on quality companies with the following characteristics:

• A consistent track record of increasing sales and profits.
• High returns on capital employed (ROCE).
• An ability to turn a high proportion of profits into free cash flow.

2.  Arguably, the biggest danger that shareholders face when investing in a business is the company's debt.  

The investor must learn how to analyse a company's debts and to distinguish between safe and dangerous companies.  

This will help the investor to stay away from risky investments that have the potential to damage his/her wealth.

Prudent Reserves

When something happens that causes an asset to lose value, it is written off.

• For example, if some stock (asset) is stolen, the value of the stock in the Balance Sheet is reduced.

The same thing must happen if a prudent view is that an asset has lost some of its value.

• For example, if some of the stock is obsolete and unlikely to sell for full value.
• Normally, the Balance Sheet will just show the reduced value, which will be explained with notes.

Stock reserve

The creation of a stock reserve reduces the profit.

• If it is subsequently found that the reserve was not necessary, the asset is restored to its full value and the profit is correspondingly increased in a later period.

Bad debt reserve

It is often necessary to create a bad debt reserve to cover money that may not be collectable from customers.

• This bad debt reserve reduces the profit.
• For example, loan loss reserve or provision by the banks.

Get your customers to pay on time

Take it seriously and give the task the time and resources necessary.

Tel yourself that you are entitled to be paid on time and that you are being cheated if you are not.

Agree the terms in advance and make it clear that they should be honoured.

A good motto is "ask early and ask often".

If all else fails take legal action.

A tough but fair line will probably not upset your customers, but it might.

Ask yourself if you really want those customers.

Accounting for a Major Project Lasting 4 Years in the Construction Sector

In accounting, costs must be fairly matched to sales.

This is so that the costs of the goods actually sold, and only those costs, are brought into the Profit and Loss Statement.


A Major Project lasting 4 years

Contractor will be paid $60 m
Costs over the 4 years are expected to be $55 m
Anticipated profit is $5 m.

It is almost certain the contractor will receive various stage payments over the 4 years.

This poses a multitude of accounting problems and there is more than one accounting treatment.

The aim must be to bring in both revenue and costs strictly as they are earned and incurred.

Accounting standards provide firm rules for the published accounts.

1. The full $60 m revenue will not be credited until the work is completed.
2. In fact, there will probably be a retention and it will be necessary to make a reserve for retention work.
3. The final cost and profit may not be known for some years.
4. Conventions of prudent accounting should ensure that profits are only recognized when they have clearly been earned.
5. Losses on the other hand should be recognized as soon as they can be realistically foreseen.  

Failure to act on this convention has led to scandals and nasty surprises for investors.  The collapse of some big companies being examples.


Prudence and the matching of costs to income - the Principles:

• Accruals are costs incurred, but not yet in the books.
• Prepayments are costs in the books, but not yet incurred.
• Profit is reduced by expected bad debts.
• Depreciation is a book entry to reduce the value of fixed assets.
• Profit accounting may differ from cash accounting.
• Profit Statements should be prudent.
• Costs must be matched to income.

Additional Notes:

Accruals (costs not yet entered)
Invoices are submitted after the event and some will not have been entered into the books when they are closed off.  This problem is overcome by adding in an allowance for these costs.  The uninvoiced costs are called accruals.

An example is a company whose electricity bill is around $18,000 per quarter.  Let us further assume that assume that accounts are made up to 31 December and that the last electricity bill was up to 30 November.  The accountant will accrue $6,000 for electricity used but not billed.  If electricity invoices in the period total $60,000 the added $6,000 will result in $66,000 being shown in in the Profit Statement.

Prepayments (cost entered in advance)
Costs may have been entered into the books for items where the benefit has not yet been received.  

For example, consider an insurance premium of $12,000 paid on 1 December for 12 months's coer in advance.  If the Profit Statement is made up to 31 December the costs will have been overstated by 11/12 x $12,000 = $11,000.  The accountant will reduce the costs accordingly.  These reductions are called prepayments.

Bad debt reserves and sales ledger reserves
Many businesses sell on credit and at the end of the period of the Profit Statement money will be owed by customers  Unfortunately not all this money will necessarily be received.  Among the possible reasons are:

• bad debts
• an agreement that customers may deduct a settlement discount if payment is made by a certain date.
• the customers may claim that there were shortages, or that they received faulty goods; perhaps goods were supplied on a sale-or-return basis.

The prudent accountant will make reserves to cover these eventualities, either a bad debt reserve or sales ledger reserve.  Sales (and profit) will be reduced by an appropriate amount.

Time will tell whether the reserves have been fixed at a level that was too high, too low, or just right.  If the reserves were too cautious there will be an extra profit to bring into a later Profit Statement.  If the reserves were not cautious enough there will be a further cost (and loss) to bring into a later Profit Statement.

The Myth of 'Good' Debt

By David Francis
Apr 27, 2012

The economic crisis and the tepid pace of the recovery have left millions of Americans deep in debt. And amid this slow recovery, many are struggling to make minimum payments to keep ahead of creditors.

The amount of debt the average American holds is staggering, compared with the average American salary. In its latest findings in 2010, the Social Security Administration calculated the average American wage index to be $41,673.83.

According to Creditcards.com, a website that tracks the credit card industry, the average American household holds $15,956 in credit card debt. The Census Bureau has determined than 60 percent of Americans own their homes; many of these people still owe money to a bank for mortgage payments. Estimates on the size of these payments vary, but most organizations say the majority of monthly payments fall between $700 and $1,700 per month.

[Related: Is A College Degree Worth It?]

On top of that, most Americans have to borrow money to buy a car. According to the auto website Edmunds.com, monthly car payments should average between 8 and 11 percent of monthly income, although many people pay more. College students are also forced to take out loans to pay for education. The Project on Student Debt has found that the average graduate of a four-year nonprofit university carries more than $25,000 in loans.

Based on these numbers, it seems almost impossible for the average American to be debt-free. But there are steep variations among these loans. Paying off some loans should be a priority. Others, while burdensome, can wait.

Better debt vs. worse debt.
Prior to the Great Recession, many financial experts differentiated between "good" debt and "bad" debt. The former included loans with low interest rates, such as a home loan. Because the value of a home presumably appreciated over time, the debt helped the borrower work toward building wealth. "Bad" debt included credit card loans, or loans taken out to pay for things that current cash reserves couldn't cover. The value of the product purchased with the credit card immediately depreciates upon purchase, while the money placed on the credit card immediately begins to accrue interest.

But according to David Bach, author of the Finish Rich book series and founder of www.FinishRich.com, the financial downturn changed these perceptions. "Good debt and bad debt is almost a myth that we were sold for 20 years," Bach says. "There's just debt. For the most part, debt is basically bad and difficult. It comes down to the interest rate."

Debt now seems to fall into two new categories: better debt and worse debt. Better debt is a loan with a low interest rate used to purchase something that adds value. Worse debt is used to buy a depreciating asset or debt used as a substitute for cash. A home loan, according to Bach, is an example of better debt.

"For the most part, most people have to borrow money to buy a home. The key is if you borrow money to buy a home, the faster you pay that loan off, the faster you're free," Bach says.

[Related: How to Use the IRS as a Credit Card]

The Catch-22 of debt is that one needs to go into debt to be considered a credit-worthy borrower with the ability to pay off large loans. Rod Ebrahimi, founder and CEO of ReadyforZero, a website that helps people plan to get out of debt, says establishing a good credit score is imperative for transitioning out of college. "A good debt you could have had through college is a credit card you had going into college and never carried a large balance," he says. "It may actually make sense to have some history."

However, Bach warns that this kind of debt can quickly become burdensome if the cardholder doesn't manage it responsibly. "If you're going to borrow money on your credit card, the goal should to be pay it off in full at the end of the month," Bach says. "Don't get stuck in the trap of paying minimum payments. Pay off these cards as fast as possible."

Making sound education decisions.
Ebrahimi says the growing student loan burden and the poor state of the economy, especially for young people, means students must approach student loans differently. They are often necessary, but one needs to be strategic in how they are used. He warns against using loans at for-profit universities, which promise much but often fail to deliver jobs that allow students to pay off their loans.

"At for-profit schools, you can get all kinds of degrees and you end up with six-figure debt, then can't find a job that allows you to pay them," he says.

He adds that loans should also be used strategically at nonprofit universities. "There can be good and bad students loans" at nonprofit universities, Ebrahimi says. "Many people believe they can pay at any university," but often, payments at state school are easier to manage.

http://finance.yahoo.com/news/myth-good-debt-170611202.html

There are Two Types of Debts: Good Debt and Bad Debt (Real Estate Investing)

Invest for cash flows and not for capital appreciation.

Good Debt vs Bad Debt vs Ugly Debt

Debt Levels Alone Don’t Tell the Whole Story

By FLOYD NORRIS

Published: September 23, 2011

AS the world’s central bankers and finance ministers gather in Washington this weekend for the annual meetings of the International Monetary Fund and World Bank, government debt is at the top of the agenda. Some governments can no longer borrow money and others can do so only at relatively high interest rates. Reducing budget deficits has become a prime goal for nearly all countries.

Multimedia

Graphic

Why Some European Government Debt Seemed Deceptively Small

But looking only at government debt totals can provide a misleading picture of a country’s fiscal situation, as can be seen from the accompanying tables showing both government and private sector debt as a percentage of gross domestic product for eight members of the euro zone. The eight include the largest countries and those that have run into severe problems.

In 2007, before the credit crisis hit, an analysis of government debt would have shown that Ireland was by far the most fiscally conservative of the countries. Its net government debt — a figure that deducts government financial assets like gold and foreign exchange reserves from the money owed by the government — stood at just 11 percent of G.D.P.

By contrast, Germany appeared to be in the middle of the pack and Italy was among the most indebted of the group.

Yet Ireland was slated to become one of the first casualties of the credit crisis, and is now among the most heavily indebted. Germany is doing just fine. Italian debt has risen only slowly. The I.M.F. forecasts that Ireland’s debt-to-G.D.P. ratio will be greater than that of Italy by 2013.

It turned out that what mattered most in Ireland was private sector debt. As the charts show, debts of households and nonfinancial corporations then amounted to 241 percent of G.D.P., the highest of any country in the group.

“In Ireland, as in Spain, the government paid down debt while private sector grew,” said Rebecca Wilder, an economist and money manager whose blog at the Roubini Global Economics Web site highlighted the figures this week. She was referring to trends in the early 2000s, before the crisis hit.

Much of the Irish debt had been run up in connection with a real estate boom that turned to bust, destroying the balance sheets of banks. The government rescued the banks, and wound up broke. Spain has done better, but it, too, has been badly hurt by the results of a real estate bust.

The story was completely different in the Netherlands, which in 2007 ranked just behind Ireland in apparent fiscal responsibility. It also had high private sector debt, but most of those debts have not gone bad.

The differences highlight the fact that debt numbers alone tell little. For a country, the ability of the economy to generate growth and profit, and thus tax revenue, is more important. For the private sector, it matters greatly what the debt was used to finance. If it created valuable assets that will bring in future income, it may be good. Even if the borrowed money went to support consumption, it may still be fine if the borrowers have ample income to repay the debt.

That is one reason many euro zone countries are struggling even with harsh programs to slash government spending. With unemployment high and growth low — or nonexistent — it is not easy to find the money to reduce debts. And debt-to-G.D.P. ratios will rise when economies shrink, even if the government is not borrowing more money.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

http://www.nytimes.com/2011/09/24/business/debt-numbers-alone-tell-little-about-fiscal-stability.html?_r=1&ref=business

Wednesday March 30, 2011

Don't over-borrow

Plain Speaking - By Yap Leng Kuen

ALTHOUGH only two restrictions have been placed on borrowing for the purchase of a third or more homes and credit card eligibility, it does not mean that there won't be more to come.

In fact, consumers should be vigilant as Bank Negara is believed to be putting more intensive supervision on certain aspects of the property and personal loans sectors.

For example, the 5:95 property loan scheme offered by certain companies falls under this category of supervision.

Under this arrangement that was implemented during the market doldrums, only 5% downpayment was required for the purchase of a property with the rest of the financing in the form of a bank loan.

There was talk that the 5:95 scheme was mainly extended to affluent housebuyers but the bulk of the repayments are coming onstream this year. Hence, the monitoring of these repayments as well as pockets of borrowing that are still available under this scheme.

Personal loans form 15% of the total loans portfolio but due to the higher borrowing rates, extra care and discipline are required to guard against over-borrowing.

The extension of credit by non-bank institutions is also being monitored amidst lessons gleaned from countries suffering from high indebtedness.

Credit schemes extended by cooperatives and cooperative banks are likely to be scrutinised for affordability on the part of the borrowers.

Covering all aspects of household loans, the upcoming guidelines on lending and affordability represent part of the internal controls that are put in place to monitor the situation.

Under this surveillance, over-lending to single borrowers is discouraged.

In fact, the entire credit scenario is being assessed via a holistic package of policies and measures that cover prudential, intensive supervision, standards on banking institutions and consumer education.

Household indebtedness, at 75.9% of Gross Domestic Product at the end of last year, may be on the increase but indications are that it has not become destabilising.

On the contrary, wealth accumulation remains healthy with liquid assets forming 64% of financial assets while delinquency levels remain low - the non-performing loans for credit cards is at 2%.

Nevertheless, it is not a time to be sanguine especially when high energy and commodity prices pose risks to the economy.

Senior business editor Yap Leng Kuen views this an opportune time to remind everyone that “prevention is better than cure.''

http://biz.thestar.com.my/news/story.asp?file=/2011/3/30/business/8375253&sec=business

Investors get back into top gear

Investors get back into top gear

Annette Sampson
October 23, 2010

IF one good thing has come out of the global financial crisis it's that investors are thinking twice before risking their shirts through rampant speculation. At least for the moment. But if you have the appetite and nerves to handle a bit of risk, gearing is re-emerging as an option.

While many investors were turned off the idea of borrowing to invest when prices were tumbling, a recovering sharemarket - and the realisation that keeping your money in cash might keep it safe but it won't build wealth - is slowly re-igniting interest in gearing. But the new style of gearing is much different to what we saw during the boom.

The saga of Storm Financial has highlighted the hazards of aggressive one-size-fits-all gearing strategies - and the shonks that promote them. But smart investors are using gearing strategically, as a complement to their other investment strategies. Instead of diving in boots and all they are weighing the risks and using gearing where it has the best potential to enhance returns.

ING's technical services manager, Graeme Colley, has been talking to advisers and says there is much more focus on the potential downside. As well as understanding what a fall in investment values would mean to a gearing strategy, he says more attention is being paid to issues such as double gearing, where you borrow to invest in a geared investment.

Double gearing can be overt - such as the aggressive strategies where borrowers were encouraged to draw on their home equity to use as collateral for something like a margin loan. But it can also be less obvious, such as when you borrow to invest in companies that may also be heavily geared. The classic example occurred with listed property trusts. These trusts were popular with investors as they generated a healthy income, which could be used to help fund interest payments. But many of them were heavily geared and among the biggest losers when the market fell.

Colley says it is important for investors to know the gearing levels of their underlying investments and to consider the total gearing level - not just their own borrowings. This may mean avoiding stocks with higher gearing, or reducing your own borrowing to avoid a risk blowout.

Colley says how you borrow is also critical. The cheapest way is often to draw on home equity. It also has the advantage of not being subject to margin calls if your investments drop in value. But it is important to consider the borrowings in terms of your overall financial strategy.

One strategy that can be used, Colley says, is debt recycling where you gradually replace non-deductible mortgage debt with tax-deductible investment debt. Let's say you owe $300,000 on your mortgage and are comfortable with that. You can continue making repayments, but progressively draw on your home equity up to that $300,000 limit to invest (so long as it is properly documented for tax purposes). You should have extra income to accelerate your loan repayments thanks to the income from your investment and the tax deduction on the investment component of your borrowings.

Colley says this is also a prudent approach as you are drip feeding your borrowings into the investment market, rather than doing it all at once, and you can pay off the loan as a lump sum when you sell your investments.

With lower tax rates and more interest in positive rather than negative gearing (with positive gearing, the income from your investment exceeds the borrowing costs so you are making a profit from day one) careful tax planning is also a priority. As a rule of thumb, Colley says if your investment is going to be negatively geared (that is, generating a loss) it is better for the borrowings and investment to be held by someone on a higher marginal tax rate as they will get a bigger tax deduction. But if the investment is positively geared (or likely to become profitable in the shorter term), it may be better done by a lower earner.

However, Colley warns that if you get too smart and put the borrowings in the higher earner's name and the investment in those of the lower earner, you will get the worst of both worlds as the borrowings will not be deductible but the income and capital gain will be taxed.

For those considering a margin loan, positive gearing can also reduce the risks of a margin call. As the graph shows, if you borrow the maximum allowed with a margin loan, a fall of less than 10 per cent in investment values can result in a call from your lender asking you to stump up extra cash or collateral to reduce your loan ratio. Ten per cent movements are not unusual in the current market.

But if you borrow less, not only is the income more likely to cover your borrowing costs, but you can set yourself up so there is no whisper of a margin call unless the market crashes by 30 per cent or more.

It's all about borrowing smarter, if you're sure you should be borrowing at all.


http://www.brisbanetimes.com.au/business/investors-get-back-into-top-gear-20101022-16xtk.html

A quick look at Nam Fatt - PN17 (1.5.2010)

Nam Fatt Corporation Berhad Company

Business Description:
Nam Fatt Corporation Berhad. The Group's principal activities are constructing bridges, heavy concrete foundations, roads, factory complexes and other similar construction activities. Other activities include building, maintaining and operating the Jiangjin Bridge on a built-operate-transfer basis, constructing projects in the oil, gas and petrochemical related industry, steel fabrication, structural steel engineering, manufacturing and trading steel doors and industrial boilers, researching, developing, producing, selling, installing and maintaining metal roofing and wall cladding, manufacturing galvanised iron roofing sheets, property development; owning and developing golf resort and its recreational amenities, property developer and property manager, resort and development, managing a golf resort and recreational clubs and investment holding. The Group operates in Malaysia, Africa and Asia.

Currency: Malaysian Ringgits
Market Cap: 28,763,370
Fiscal Yr Ends: December
Shares Outstanding: 319,593,000
Share Type: Ordinary
Closely Held Shares: 35,229,890 (11%)

16/03/2010
NAMFATT - New admission into PN17

Wright Quality Rating: LCNN Rating Explanations








A quick look at Nam Fatt - PN 17 (1.5.2010)
http://spreadsheets.google.com/pub?key=tAskkNgs3uU8eyk_WrTFcSw&output=html

Some RED FLAGS (hindsight) in the accounts of Nam Fatt at end of 2008 to note are:

Share price 
RM 0.19  or market capitalisation of 34.16 m. (The price rose to RM 0.30 from March 2009 and dropped precipitously to RM 0.09 when the news of the company's financial problem was known.)

Income statement
Negative earnings -14.09 m
Interest expense -18.73 m

Cash flow statement
Negative CFO  -41.27 m
Neglible CFI
Negative FCF  -44.10 m
CFF  -34.11 m (Borrowings increased significantly)

Balance sheet
Total Debt 499.69 m
Account Payables' Days 206.58 days  (This then increased to 714.24 days in end of 2009)
Interest cover 0.66
Total Debt/Equity 0.82
Net Debt to EBITDA 26.64  (Ideally, this should be less than 5.  Bankers do not lend if this ratio exceed this figure.)

Of interest, these commonly used parameters DID NOT raise any red flags at end of 2008:

Equity 607.44 m (What is the actual value?!)
NAV 1.59
Current ratio 1.54
Quick ratio 1.51
Account Payables' Days 82.22 days (Though this subsequently ballooned to 307.08 days in end of 2009)
LTD/Equity 0.34
Dividend 2.08 m


Related article:

Measure long-term solvency and stability

Assessing indebtedness. How much debt is too much?

Acceptable debt

Debt and Leverage: Financial weapon of mass destruction

Be fearful of excessive leverage and debt

Buying Stocks on the Verge of Bankruptcy

8 Signs Of A Doomed Stock

Red Flags and Pitfalls for Avoiding Financial Fakery

Asset valuation approach in liquidation

Liquidation value is the net realizable amount that could be generated by selling a company’s assets and discharging all its liabilities.

When valuing a business for liquidation, most assets are marked down and the liabilities treated at face value. 

• Cash and securities are taken at face value.
• Receivables require a small discount (perhaps 15 percent to 25 percent off).
• Inventory a larger discount (perhaps 50 percent to 75 percent off).
• Fixed assets at least as much as inventory.
• Any goodwill should probably be ignored.
• Most intangible assets and prepaid expenses should beignored.

The residual is the shareholders’ take.

This valuation method is useful for companies being dissolved.

When Good Customers Become Bad Bill Payers

When Good Customers Become Bad Bill Payers

By CAITLIN KELLY
Published: December 16, 2009

When credit markets seized up more than a year ago, many small businesses were caught flat-footed. Their clients were not paying, or were paying more slowly, and the owners were left emotionally stressed and financially damaged.

Cindy White, whose ribbon knitted jackets sell for upward of $800 in fashion boutiques, says she’s reluctant to press nonpayers too hard. “They’re my bread and butter,” she said.

But after the initial shock wore off, those owners have come up with a variety of ways to make sure they do get paid.

The National Federation of Independent Business, which has 350,000 members, signed up 200 members for a Web seminar on collections, said Karen Harned, executive director for the organization’s small-business legal center. “This is always a big issue for small-business owners.”

Arne Salkin, an account executive with Transworld Systems, a 39-year-old national collections agency, said the problem was felt by owners in an array of businesses. “Our clients include cigarette wholesalers, pest management companies, nursing homes and private day schools,” he said

With 150 offices and 75,000 customers across the United States, Transworld sends out customized demand letters, he said. Its customers, most of them small businesses, pay $750 for a series of five letters asking for payment, each escalating in intensity. Typically, they are sent out every two weeks, matching a standard pay period.

This system worked, in one instance, for David Neal, assistant corporate controller for Hoover Treated Wood Products, a lumber wholesaler in Thomson, Ga., when a client owing $15,000 paid the entire amount after receiving two letters. “I was shocked,” Mr. Neal said. “We were very surprised that it worked.”

But another client — a longtime customer, Mr. Neal said — was in arrears for $45,000, ignored all five letters and then went out of business in late October. “It will have to be written off,” he said.

That is painful for a low-margin industry like his, which typically bills within 15 days and in which 95 percent of clients pay promptly, Mr. Neal said. His firm typically has $4.5 million a week in receivables, he said, and payments started slowing in November 2008.

Geoffrey Wilson, owner of 352 Media, a 10-year-old Web development firm in Gainesville, Fla., lost $165,000 in early 2008 when three clients did not pay. The three firms were start-ups, he said, two in Florida, one in Michigan.

“It was devastating,” he said. “It damaged our cash flow and really hurt us.” The company, with major companies like Microsoft and American Express, did not have to lay off any of its 40 employees, but the experience left scars, Mr. Wilson said.

“It makes you really angry,” he said. “These were clients we had extensive interactions with over several months, sometimes with as many as 50 meetings. It felt very personal. Suddenly you have to threaten them, sue them.”

Today, Mr. Wilson is much more cautious about accepting new clients and is clear from the outset about payment terms — 33 percent upfront, raised from 25 percent in August 2008. Clients are now classified as standard or preferred, the latter being firms with 15 employees and at least two years in business. Standard clients must pay in full before material is delivered, and the business owner will be asked for a personal guarantee, he said.

Some customers are newly candid about their own financial woes, “which we’d never seen before,” he said. “They’ve become very truthful. As a business owner, I really appreciate their honesty. It allows us to better plan our situation. I need an accurate understanding of what’s coming in instead of having a client simply go silent.”

Lisa Brock, head of Brock Communications in Tampa, Fla., is taking a personal approach to managing late payers, recently visiting the chief executives of two local clients to negotiate payment. Now, more than ever, Ms. Brock said, she wants to know whom she is dealing with before entering into any business deal. A free consultation allows her to decide if a client’s values match hers. If so, she delves deeply into their references. “We’ve done more of this recently than in the 14 years we’ve been in business,” she said. “There are a number of ways to check people out: annual reports, a Dun & Bradstreet report, ask for personal and professional references.”

Cindy White, whose 11-year-old company manufactures knitted ribbon jackets that are sold in 40 high-end boutiques nationwide for $800 to $1,000, has been owed $5,000 for six months from several clients, forcing her to lay off employees. She has also fallen behind in the rent on her Phoenix design studio. “I have a lot of stores out there who owe me money, but they’re my bread and butter. You don’t want to upset them by suing or sending out collection letters.”

The decision whether to hold back or escalate demands for payment was made for her recently after a seven-year client, a store that closed, refused to communicate with her and did not pay for the jackets she had shipped. “I was furious,” Ms. White said. “This was a store I had a longstanding relationship with.”

Ever since, she said, “I have been on the phone every few days with all the stores that owe me money, just keeping tabs and making sure they are still viable.” She said she is hopeful that the economy will come back, and “I am willing to work with them because they are my lifeblood.”

Such attentiveness is necessary, agreed Ms. Brock. “I look at our profit and loss statements biweekly.” She advises scrutinizing client lists to predict potential trouble spots. “Even having two slow payers is significant.”

When a client refuses to pay, last-ditch options include

• hiring a collections agency — which typically recoup in full only 11 percent of the time —
• hiring a collections lawyer, who may claim one-third of what they recover, or
• filing a case in small-claims court. Joshua Friedman, a collections lawyer in Beverly Hills, Calif., said his business had been booming since last fall, with clients coming to him “in every field you can imagine.”

“Sometimes people can’t pay. Sometimes it’s a matter of straight-out fraud, where buyers are not doing enough due diligence. People are desperate to do the deal,” he said. Mr. Friedman takes on only cases worth more than $10,000.

“I try to resolve everything without filing a suit,” he said. His success rate is still only 20 percent, he warned. “My clients know better than I do if the client is really likely to settle.”

http://www.nytimes.com/2009/12/17/business/17markets.html?ref=business