e-Commerce for Credit Managers

The best things in life are free
But you can keep them for the birds and bees
Now give me money
That's what I want '

In the early days of the dot-com boom, it really seemed like 'the best things in life (were) free,' as Barrett Strong, and then The Beatles sang in 'Money (That's What I Want), the classic Berry Gordy-Janie Bradford ode to pecuniary pursuits and happiness that so many artists have performed.

You remember the boom, right? Everything appeared to be available online for the taking.

As the dot-commers grew up, though, they learned a reality of life ' you can't always get what you want, unless you pay the bill for it (with apologies to Mick Jagger, but a bit more on him later).

But unlike venture capitalists, trade creditors don't want potential. Online firms must still collect their receivables and pay their payables to survive ' and so do those who do business with them. Just as in any other part of the economy, regardless of whether a customer is online or in a more traditional setup, 'Main Street' vendors demand money. You know ' 'That's what (they) want.'

In fact, as the number of e-commerce firms continues to expand, there may be few firms that still do not sell to online entities. That translates to this: Collecting bills from firms that exist only on a computer server and monitors is becoming as much a part of Main Street in the 21^st century as selling to the corner store was in the
19th, and as selling to the mall store was in the 20th century. Suppliers to e-commerce firms, whether of inventory for resale online, or of servers or other equipment used in operations, must be paid, or they will cut off credit or sell only C.O.D. A vendor to an e-commerce firm, then, still must assess its financial strength before extending credit, or demand guarantees or other security before shipping.

Some of the New Is Like the Old

Of course, these concerns are not unique to e-commerce. While many businesses will sell on terms to a new customer, significant orders will almost always be reviewed by a credit manager. Also, collections from customers are the bane of all businesses. While everyone may rejoice over the potential business from a new account, every businessperson still has to wonder whether orders will be paid by the due date on the invoice ' or whether cash-flow problems will drag the payment to 60 days, 90 days or beyond.

These are legitimate concerns, because an e-commerce customer has many reasons to drag its payables out. In a volatile economy, cash is king ' especially if the e-commerce company's own customers are themselves slow pays or questionable risks. Many firms thrive on the best type of free financing, known in the business sector as 'OPM,' or 'other people's money.' If a business can buy its needs from vendors who do not press interest charges, and will continue to supply through a period of slow payment (rather than risk losing a customer in a competitive environment), then it would be foolish not to take advantage of that opportunity.

The credit manager selling to e-commerce firms, however, must realize that the familiar rules and practical judgment that have always worked when selling to a widget producer might not apply when the customer is a virtual business. The assumption that the account can be turned over for collection implies that there is something that can be collected from the customer, or that the customer possesses some cyber-equivalent of widgets that can be repossessed and auctioned off to pay the receivable. But in e-commerce, that may not always be the case. The assets of an e-commerce firm, in contrast, might be more difficult to collect on than those of a traditional firm, if there are any assets available to collect from an e-commerce venture at all.

Consider this, for example: Many sellers are comforted by the presence of a customer's real estate ' a judgment lien imposed after winning a routine collection lawsuit can sit in the public records almost indefinitely to prevent the sale or refinancing of the property until the payable has been satisfied. But an e-commerce firm's 'real estate' is a quite different type of collateral. While the largest e-commerce firms might have warehouses and distribution centers, much like the overhead-eating facilities that traditional businesses maintain, those firms are not likely to be the credit concerns of Main Street vendors and lenders. Instead, an e-commerce firm's 'real estate' ' the location where customers find the company ' is its Internet address (the domain name, or uniform resource locator, or 'URL'). But however valuable the domain name may be to the e-commerce firm, the legal formalities of getting it might render it much less valuable to its creditors (especially, as discussed below, if a creditor plans to use the name for a different business than the one conducted by the e-commerce firm at that site). Unlike foreclosure on real estate (through a well understood mortgage or recorded judgment), foreclosure of a creditor claim on a domain name is a relatively uncharted process that at best will involve formal legal proceedings to get a court to order the transfer. The creditor will have to use counsel different from its regular collection agency representative because the unfamiliar procedures might be conducted outside the court system. As a result, the cost of foreclosing might be greater than when foreclosing on 'normal' assets, and likely more than anticipated in the credit decision. While creditors aren't technically blocked from getting a domain name, the value of a domain name in a credit analysis should not simply be equated to that of a good piece of real estate, because of the possible difficulties in getting a court to order the transfer.

'Worth' Can Be Hard to Define

To avoid confusion, note that a bank lender, or major supplier, might have enough leverage to negotiate more favorable terms, such as having itself named as the party in control of the domain-name registration. Then the creditor would have power to transfer the rights to itself on nonpayment or other default. But that leverage is not generally available to the typical unsecured trade creditor of an e-commerce firm, such as an inventory or services supplier.

In fact, it's not even clear whether a domain name is considered to be 'property' that a creditor could seize. Some courts ' and domain-name registrars ' have treated domain names as simply a 'license' right by virtue of a contract with a registrar that can be terminable if the e-commerce firm doesn't pay the required fees, and transferable, if at all, only on the registrar's terms. Large domain-name registrars even have policies that seem to discourage such transfers, whether to protect their customers, or simply to avoid entanglement in legal disputes. After all, what business wants to be known for helping its customers' creditors take away its most valuable assets?

And while once it seemed that domain names perceived to be desirable were being auctioned off regularly for large sums, as firms tried to pin down their own name (or one thought to be valuable for resale to a speculator), that perception no longer exists; instead, the growth of stable policies to protect the traditional rights of trademark holders in e-commerce, such as the Uniform Domain Name Dispute Resolution Policy (www.icann.org/udrp), has brought a degree of predictability and traditional trademark law to the domain-name bazaar. These policies have, to a certain extent, made the rules and cost of protecting a company's 'online real estate' much more predictable and, therefore, made it less likely that a particular Web address will suddenly become valuable to a speculator or investor. In other words, a customer's URL might be very valuable to that customer, and someone who continues its business, but next to worthless to a vendor or lender looking for collateral value independent of the customer's business. The name may be valuable, for instance, only to a creditor interested in taking over the customer's business as a going concern, which is a relatively uncommon occurrence in an era when businesses strive to avoid successor liability.

Another point to ponder: Unlike 'physical' real estate, the supply of virtual addresses is by no means fixed. While there can be only one Main Street in any town, the supply of domain-name addresses is expandable, in several ways ' just as traditional Main Street landlords saw their property values plummet as new Main Streets sprouted up in malls and suburbia. Most simply, a firm can bypass a blocked domain name by registering a variation of it, as long as the variation is not 'confusingly similar' to the already-taken name, in which case the confusingly similar mark would be in violation of trademark law. In addition, several new domains have been introduced to compete with .com, such as .biz (www.neulevel.biz) and .us (www.nic.us), and abroad, .eu (www.eurid.eu) and .asia (www.dotasia.org). (A complete list is available at www.icann.org/registrars/accredited-list.html.) While certainly .com remains the most familiar domain name in which to locate an e-commerce firm, the increasing use of alternative domains, and growing comfort and sophistication of e-commerce shoppers ' particularly business-to-business buyers ' should make these domains the modern cyber-equivalent of the first suburban shopping malls and centers built to avoid the gridlock on downtown real estate in the post-World War II economy.

Virtually Nothing to Lien On

Another major difference in credit analysis is the absence of a mechanics' lien procedure. While 'real world' firms that hire contractors to do work on real estate risk having the contractor unilaterally create a lien if the work is not paid for, under procedures available in all states (and well known and understood by the business community generally), no comparable process exists for e-commerce firms ' or, for that matter, real-world customers who have no real estate. Many businesspeople, based on experiences with mechanics' liens during construction of a home or the execution of retail improvements, might naively assume that similar protection would be available to them in collecting from customers. They then allow credit to build, only to learn the contrary truth when the account goes bad, and they must hire a collection agency that ultimately cannot collect the debt.

As a result, the relatively common businessperson's demand that his or her attorney 'get a lien' from a vendor will be as fruitless against an e-commerce customer as it would be against a tenant in an office building or industrial park. In both cases, the vendor must follow the traditional ' and often protracted and expensive ' route of suing for a judgment, and locating assets to seize and sell. Unless the vendor can show a risk of 'irreparable harm' ' something that will make it impossible to make the vendor whole if a court does not intervene immediately ' courts will not expedite the collection proceedings. The law assumes instead that money damages can always cure any harm. Unfortunately for creditors, the law ignores the extremely compelling business reality that a customer might not have any funds to pay a judgment by the time a court can issue it, so routine collection claims rarely will qualify for this immediate relief. Moreover, unless the vendor is willing to give up a percentage of the collection ' typically 20% to 33% to a law firm working on a contingency fee ' then the vendor must also take into account the legal fees it will incur to collect from the e-commerce firm. (A well advised firm will reserve the right to collect those fees back in its contract with the customer, such as in the fine print on an invoice or order confirmation ' assuming that the delinquent customer has any funds to pay the fee.)

Keep in mind, too, that everything must also be discounted by the time-related value of money, given the extended stretches of time necessary for typical collection proceeding to unfold. Even in those courts that can process a collection lawsuit in the relatively 'expedited' time of a year to 18 months, the cost of carrying that receivable will far exceed the 30- to 90-day carrying charge built into a typical firm's budget.

Despite all these problems, the vendor might have no collection alternative to spending the legal fees and court costs, and loss of productive time, except to sue the e-commerce customer. The credit analysis, then, must consider what assets of the e-commerce firm it can try to recover to satisfy the judgment, if it wins in court, to pay the unpaid invoices. Certainly, 'traditional' assets might be available ' that is, if the e-commerce firm has them, and hasn't already hocked them to a bank or asset-based lender (the popular 'business finance' units that lend at high rates to firms unable to satisfy typically more stringent bank-loan terms). Such assets include cash and cash-like holdings, such as inventory and accounts receivable ' all very liquid, and easy to turn into money to repay the creditor, if it can get to them first, ahead of other creditors (such as bank lenders). But the hard truth of the matter is that these assets might already be locked up if the e-commerce firm has financing in place, and sometimes literally, such as in the case of customer payments that are directed to a lockbox controlled by the lender. The financing terms also will typically prohibit granting any liens to junior suppliers (other than perhaps a lien limited to the goods they supply), and might even require that payments be deferred until the primary lender has been paid. And ' once receivables go into collection, they invariably decline in value, as savvy customers gamble that a lender (with whom they have no ongoing relationship) might be less willing to pursue collections of smaller amounts, or more willing to settle for less than face value in the interest of payment now, rather than later.

Other Assets Can Matter, Too

Beyond the most liquid assets, the typical e-commerce firm also often has, not surprisingly, intangible assets (in addition to its domain name), such as:

• Contract rights with third parties, like suppliers, distributors and advertisers;
• Intellectual property, like trademarks, copyrights and patents; and;
• Software used to run the site and e-commerce operations.

Just as with the domain name, however, turning these assets into value will also pose many complications for a creditor, even after it has a court order transferring them to the foreclosing creditor. After all, the creditor can get only whatever rights might be transferable ' if any. Contracts, for example, may not be assignable. The other party, for instance, might have a right to get out of them if the e-commerce party isn't involved. The contracts may also have other terms or penalties that the creditor must assume, if it wants the benefit of the contract for itself (or a third party to whom it wants to sell the contract rights).

The e-commerce firm might also have less-liquid physical assets, such as the servers used to operate its Web site, in addition to typical office equipment. Unfortunately, those assets frequently have little more than salvage value, and generally are leased, rather than owned. Again, a lender or financing company probably has the first position on them. Also, frequently, tangible and intangible assets are inextricably intertwined, so that ownership is hard to separate, such as code on a computer, and this presents a situation that increases the cost and complexity of seizing such assets. All in all, then, the e-commerce company's physical assets probably have little value to a creditor, other than by remaining in the hands of the company to use in its business to generate proceeds to pay down its obligations.

Transfers of intellectual property registered with the U.S. Patent and Trademark Office or the U.S. Copyright Office, will involve potentially complex procedures with those offices, but will primarily be done through the courts. For that reason, most collateral transfers to lenders, as security for a loan, try to avoid this cost and complexity through a collateral assignment, much like a mortgage or security agreement for other assets. Trademark law, too, is interesting to look at in this regard. It, for example, has a unique twist affecting the value of a mark to creditors: A mark cannot exist independently of the goodwill of the business associated with it. In other words, a creditor that would like to obtain a transfer of a trademark to use for its own ' different ' business would risk having the mark (and the benefits of federal registration) become void and worthless. (Some consensual, voluntary transfers have even been rejected over this issue.) Unfortunately, these procedures by which creditors can seize intellectual-property assets require the advance cooperation of the owner, or, known by his or her other name ' the customer. The 'after the fact' collection process does not have that luxury.

Of no surprise to e-commerce counsel, but perhaps to some people, is that much intellectual property critical for day-to-day operations might be in the form of undocumented trade secrets or goodwill, which is hard to obtain independently of operation of the business and employment of key employees for sale to a third party, which a lender, much less a trade creditor, usually does not want to undertake. This being the case, while a vendor to an e-commerce company might see value in its IP portfolio, that value rarely will be preserved for the benefit of a foreclosing creditor ' if it hasn't already been claimed by the bank lender or finance company, along with all of the other assets.

Down to the Nitty-Gritty

So, how can a vendor to an online company protect itself, when finding assets, much less foreclosing on them, is difficult, expensive, and likely to be contested by senior lenders?

While a virtual company with an online existence might have tremendous value in the virtual world, that currency doesn't help its suppliers pay their own real-world bills. But this dilemma is really no different from that faced by most trade creditors who provide goods and services, whether to businesses on Main Street, USA, or online: Unsecured creditors are almost always last in line, ahead only of those who invested in equity (or equity like securities).

The 'solution,' if that term is accurate, is nothing more than traditional credit management. Just as with a startup firm located next door, or an order received over the phone, a credit manager should evaluate credit extensions to an e-commerce firm on the basis that they might not be repaid, at least not until the company has a track record, and advance only what it is willing to write off. The credit manager should also think about the euphemistically named 'credit supports' ' marketing jargon for the always distasteful 'personal guarantee' or other security granted by principals of the company (assuming that the owners have sufficient unencumbered assets of value in their own name that could be seized to pay bills). However uncomfortable it might be to demand a personal guarantee (or other strong security) before providing goods or services to the e-commerce company, that level of discomfort pales next to the discomfort that is an inherent component of the conversation explaining the large uncollectible receivable to a business owner, or its lending officer.

After all, helping a good or prospective customer through a difficult time with easy credit (OK ' call it very loosely love) may, to paraphrase the Beatles, give your firm thrills, but (it) don't pay your bills ' which, as the group's then-contemporary musician-businessman sang, won't get your firm any satisfaction.

The best things in life are free
But you can keep them for the birds and bees
Now give me money
That's what I want '

In the early days of the dot-com boom, it really seemed like 'the best things in life (were) free,' as Barrett Strong, and then The Beatles sang in 'Money (That's What I Want), the classic Berry Gordy-Janie Bradford ode to pecuniary pursuits and happiness that so many artists have performed.

You remember the boom, right? Everything appeared to be available online for the taking.

As the dot-commers grew up, though, they learned a reality of life ' you can't always get what you want, unless you pay the bill for it (with apologies to Mick Jagger, but a bit more on him later).

But unlike venture capitalists, trade creditors don't want potential. Online firms must still collect their receivables and pay their payables to survive ' and so do those who do business with them. Just as in any other part of the economy, regardless of whether a customer is online or in a more traditional setup, 'Main Street' vendors demand money. You know ' 'That's what (they) want.'

In fact, as the number of e-commerce firms continues to expand, there may be few firms that still do not sell to online entities. That translates to this: Collecting bills from firms that exist only on a computer server and monitors is becoming as much a part of Main Street in the 21^st century as selling to the corner store was in the
19th, and as selling to the mall store was in the 20th century. Suppliers to e-commerce firms, whether of inventory for resale online, or of servers or other equipment used in operations, must be paid, or they will cut off credit or sell only C.O.D. A vendor to an e-commerce firm, then, still must assess its financial strength before extending credit, or demand guarantees or other security before shipping.

Some of the New Is Like the Old

Of course, these concerns are not unique to e-commerce. While many businesses will sell on terms to a new customer, significant orders will almost always be reviewed by a credit manager. Also, collections from customers are the bane of all businesses. While everyone may rejoice over the potential business from a new account, every businessperson still has to wonder whether orders will be paid by the due date on the invoice ' or whether cash-flow problems will drag the payment to 60 days, 90 days or beyond.

These are legitimate concerns, because an e-commerce customer has many reasons to drag its payables out. In a volatile economy, cash is king ' especially if the e-commerce company's own customers are themselves slow pays or questionable risks. Many firms thrive on the best type of free financing, known in the business sector as 'OPM,' or 'other people's money.' If a business can buy its needs from vendors who do not press interest charges, and will continue to supply through a period of slow payment (rather than risk losing a customer in a competitive environment), then it would be foolish not to take advantage of that opportunity.

The credit manager selling to e-commerce firms, however, must realize that the familiar rules and practical judgment that have always worked when selling to a widget producer might not apply when the customer is a virtual business. The assumption that the account can be turned over for collection implies that there is something that can be collected from the customer, or that the customer possesses some cyber-equivalent of widgets that can be repossessed and auctioned off to pay the receivable. But in e-commerce, that may not always be the case. The assets of an e-commerce firm, in contrast, might be more difficult to collect on than those of a traditional firm, if there are any assets available to collect from an e-commerce venture at all.

Consider this, for example: Many sellers are comforted by the presence of a customer's real estate ' a judgment lien imposed after winning a routine collection lawsuit can sit in the public records almost indefinitely to prevent the sale or refinancing of the property until the payable has been satisfied. But an e-commerce firm's 'real estate' is a quite different type of collateral. While the largest e-commerce firms might have warehouses and distribution centers, much like the overhead-eating facilities that traditional businesses maintain, those firms are not likely to be the credit concerns of Main Street vendors and lenders. Instead, an e-commerce firm's 'real estate' ' the location where customers find the company ' is its Internet address (the domain name, or uniform resource locator, or 'URL'). But however valuable the domain name may be to the e-commerce firm, the legal formalities of getting it might render it much less valuable to its creditors (especially, as discussed below, if a creditor plans to use the name for a different business than the one conducted by the e-commerce firm at that site). Unlike foreclosure on real estate (through a well understood mortgage or recorded judgment), foreclosure of a creditor claim on a domain name is a relatively uncharted process that at best will involve formal legal proceedings to get a court to order the transfer. The creditor will have to use counsel different from its regular collection agency representative because the unfamiliar procedures might be conducted outside the court system. As a result, the cost of foreclosing might be greater than when foreclosing on 'normal' assets, and likely more than anticipated in the credit decision. While creditors aren't technically blocked from getting a domain name, the value of a domain name in a credit analysis should not simply be equated to that of a good piece of real estate, because of the possible difficulties in getting a court to order the transfer.

'Worth' Can Be Hard to Define

To avoid confusion, note that a bank lender, or major supplier, might have enough leverage to negotiate more favorable terms, such as having itself named as the party in control of the domain-name registration. Then the creditor would have power to transfer the rights to itself on nonpayment or other default. But that leverage is not generally available to the typical unsecured trade creditor of an e-commerce firm, such as an inventory or services supplier.

In fact, it's not even clear whether a domain name is considered to be 'property' that a creditor could seize. Some courts ' and domain-name registrars ' have treated domain names as simply a 'license' right by virtue of a contract with a registrar that can be terminable if the e-commerce firm doesn't pay the required fees, and transferable, if at all, only on the registrar's terms. Large domain-name registrars even have policies that seem to discourage such transfers, whether to protect their customers, or simply to avoid entanglement in legal disputes. After all, what business wants to be known for helping its customers' creditors take away its most valuable assets?

And while once it seemed that domain names perceived to be desirable were being auctioned off regularly for large sums, as firms tried to pin down their own name (or one thought to be valuable for resale to a speculator), that perception no longer exists; instead, the growth of stable policies to protect the traditional rights of trademark holders in e-commerce, such as the Uniform Domain Name Dispute Resolution Policy (www.icann.org/udrp), has brought a degree of predictability and traditional trademark law to the domain-name bazaar. These policies have, to a certain extent, made the rules and cost of protecting a company's 'online real estate' much more predictable and, therefore, made it less likely that a particular Web address will suddenly become valuable to a speculator or investor. In other words, a customer's URL might be very valuable to that customer, and someone who continues its business, but next to worthless to a vendor or lender looking for collateral value independent of the customer's business. The name may be valuable, for instance, only to a creditor interested in taking over the customer's business as a going concern, which is a relatively uncommon occurrence in an era when businesses strive to avoid successor liability.

Another point to ponder: Unlike 'physical' real estate, the supply of virtual addresses is by no means fixed. While there can be only one Main Street in any town, the supply of domain-name addresses is expandable, in several ways ' just as traditional Main Street landlords saw their property values plummet as new Main Streets sprouted up in malls and suburbia. Most simply, a firm can bypass a blocked domain name by registering a variation of it, as long as the variation is not 'confusingly similar' to the already-taken name, in which case the confusingly similar mark would be in violation of trademark law. In addition, several new domains have been introduced to compete with .com, such as .biz (www.neulevel.biz) and .us (www.nic.us), and abroad, .eu (www.eurid.eu) and .asia (www.dotasia.org). (A complete list is available at www.icann.org/registrars/accredited-list.html.) While certainly .com remains the most familiar domain name in which to locate an e-commerce firm, the increasing use of alternative domains, and growing comfort and sophistication of e-commerce shoppers ' particularly business-to-business buyers ' should make these domains the modern cyber-equivalent of the first suburban shopping malls and centers built to avoid the gridlock on downtown real estate in the post-World War II economy.

Virtually Nothing to Lien On

Another major difference in credit analysis is the absence of a mechanics' lien procedure. While 'real world' firms that hire contractors to do work on real estate risk having the contractor unilaterally create a lien if the work is not paid for, under procedures available in all states (and well known and understood by the business community generally), no comparable process exists for e-commerce firms ' or, for that matter, real-world customers who have no real estate. Many businesspeople, based on experiences with mechanics' liens during construction of a home or the execution of retail improvements, might naively assume that similar protection would be available to them in collecting from customers. They then allow credit to build, only to learn the contrary truth when the account goes bad, and they must hire a collection agency that ultimately cannot collect the debt.

As a result, the relatively common businessperson's demand that his or her attorney 'get a lien' from a vendor will be as fruitless against an e-commerce customer as it would be against a tenant in an office building or industrial park. In both cases, the vendor must follow the traditional ' and often protracted and expensive ' route of suing for a judgment, and locating assets to seize and sell. Unless the vendor can show a risk of 'irreparable harm' ' something that will make it impossible to make the vendor whole if a court does not intervene immediately ' courts will not expedite the collection proceedings. The law assumes instead that money damages can always cure any harm. Unfortunately for creditors, the law ignores the extremely compelling business reality that a customer might not have any funds to pay a judgment by the time a court can issue it, so routine collection claims rarely will qualify for this immediate relief. Moreover, unless the vendor is willing to give up a percentage of the collection ' typically 20% to 33% to a law firm working on a contingency fee ' then the vendor must also take into account the legal fees it will incur to collect from the e-commerce firm. (A well advised firm will reserve the right to collect those fees back in its contract with the customer, such as in the fine print on an invoice or order confirmation ' assuming that the delinquent customer has any funds to pay the fee.)

Keep in mind, too, that everything must also be discounted by the time-related value of money, given the extended stretches of time necessary for typical collection proceeding to unfold. Even in those courts that can process a collection lawsuit in the relatively 'expedited' time of a year to 18 months, the cost of carrying that receivable will far exceed the 30- to 90-day carrying charge built into a typical firm's budget.

Despite all these problems, the vendor might have no collection alternative to spending the legal fees and court costs, and loss of productive time, except to sue the e-commerce customer. The credit analysis, then, must consider what assets of the e-commerce firm it can try to recover to satisfy the judgment, if it wins in court, to pay the unpaid invoices. Certainly, 'traditional' assets might be available ' that is, if the e-commerce firm has them, and hasn't already hocked them to a bank or asset-based lender (the popular 'business finance' units that lend at high rates to firms unable to satisfy typically more stringent bank-loan terms). Such assets include cash and cash-like holdings, such as inventory and accounts receivable ' all very liquid, and easy to turn into money to repay the creditor, if it can get to them first, ahead of other creditors (such as bank lenders). But the hard truth of the matter is that these assets might already be locked up if the e-commerce firm has financing in place, and sometimes literally, such as in the case of customer payments that are directed to a lockbox controlled by the lender. The financing terms also will typically prohibit granting any liens to junior suppliers (other than perhaps a lien limited to the goods they supply), and might even require that payments be deferred until the primary lender has been paid. And ' once receivables go into collection, they invariably decline in value, as savvy customers gamble that a lender (with whom they have no ongoing relationship) might be less willing to pursue collections of smaller amounts, or more willing to settle for less than face value in the interest of payment now, rather than later.

Other Assets Can Matter, Too

Beyond the most liquid assets, the typical e-commerce firm also often has, not surprisingly, intangible assets (in addition to its domain name), such as:

• Contract rights with third parties, like suppliers, distributors and advertisers;
• Intellectual property, like trademarks, copyrights and patents; and;
• Software used to run the site and e-commerce operations.

Just as with the domain name, however, turning these assets into value will also pose many complications for a creditor, even after it has a court order transferring them to the foreclosing creditor. After all, the creditor can get only whatever rights might be transferable ' if any. Contracts, for example, may not be assignable. The other party, for instance, might have a right to get out of them if the e-commerce party isn't involved. The contracts may also have other terms or penalties that the creditor must assume, if it wants the benefit of the contract for itself (or a third party to whom it wants to sell the contract rights).

The e-commerce firm might also have less-liquid physical assets, such as the servers used to operate its Web site, in addition to typical office equipment. Unfortunately, those assets frequently have little more than salvage value, and generally are leased, rather than owned. Again, a lender or financing company probably has the first position on them. Also, frequently, tangible and intangible assets are inextricably intertwined, so that ownership is hard to separate, such as code on a computer, and this presents a situation that increases the cost and complexity of seizing such assets. All in all, then, the e-commerce company's physical assets probably have little value to a creditor, other than by remaining in the hands of the company to use in its business to generate proceeds to pay down its obligations.

Transfers of intellectual property registered with the U.S. Patent and Trademark Office or the U.S. Copyright Office, will involve potentially complex procedures with those offices, but will primarily be done through the courts. For that reason, most collateral transfers to lenders, as security for a loan, try to avoid this cost and complexity through a collateral assignment, much like a mortgage or security agreement for other assets. Trademark law, too, is interesting to look at in this regard. It, for example, has a unique twist affecting the value of a mark to creditors: A mark cannot exist independently of the goodwill of the business associated with it. In other words, a creditor that would like to obtain a transfer of a trademark to use for its own ' different ' business would risk having the mark (and the benefits of federal registration) become void and worthless. (Some consensual, voluntary transfers have even been rejected over this issue.) Unfortunately, these procedures by which creditors can seize intellectual-property assets require the advance cooperation of the owner, or, known by his or her other name ' the customer. The 'after the fact' collection process does not have that luxury.

Of no surprise to e-commerce counsel, but perhaps to some people, is that much intellectual property critical for day-to-day operations might be in the form of undocumented trade secrets or goodwill, which is hard to obtain independently of operation of the business and employment of key employees for sale to a third party, which a lender, much less a trade creditor, usually does not want to undertake. This being the case, while a vendor to an e-commerce company might see value in its IP portfolio, that value rarely will be preserved for the benefit of a foreclosing creditor ' if it hasn't already been claimed by the bank lender or finance company, along with all of the other assets.

Down to the Nitty-Gritty

So, how can a vendor to an online company protect itself, when finding assets, much less foreclosing on them, is difficult, expensive, and likely to be contested by senior lenders?

While a virtual company with an online existence might have tremendous value in the virtual world, that currency doesn't help its suppliers pay their own real-world bills. But this dilemma is really no different from that faced by most trade creditors who provide goods and services, whether to businesses on Main Street, USA, or online: Unsecured creditors are almost always last in line, ahead only of those who invested in equity (or equity like securities).

The 'solution,' if that term is accurate, is nothing more than traditional credit management. Just as with a startup firm located next door, or an order received over the phone, a credit manager should evaluate credit extensions to an e-commerce firm on the basis that they might not be repaid, at least not until the company has a track record, and advance only what it is willing to write off. The credit manager should also think about the euphemistically named 'credit supports' ' marketing jargon for the always distasteful 'personal guarantee' or other security granted by principals of the company (assuming that the owners have sufficient unencumbered assets of value in their own name that could be seized to pay bills). However uncomfortable it might be to demand a personal guarantee (or other strong security) before providing goods or services to the e-commerce company, that level of discomfort pales next to the discomfort that is an inherent component of the conversation explaining the large uncollectible receivable to a business owner, or its lending officer.

After all, helping a good or prospective customer through a difficult time with easy credit (OK ' call it very loosely love) may, to paraphrase the Beatles, give your firm thrills, but (it) don't pay your bills ' which, as the group's then-contemporary musician-businessman sang, won't get your firm any satisfaction.