Accounts Receivable Collection Tips
click here for “Top Ten Things Business Owners Do Wrong when Managing Customer Credit”
Advantages of using outsiders for collections
- You are a specialist at what you do. Collection firms do not typically design their own computer systems, nor do they build their own office furniture, nor do they manufacture telephone, photocopier or other office equipment. We don’t all clean our own offices, or plow snow or mow lawns or do landscaping or cater our office parties. We often retain outside companies to help us in performing these services for us. Why not consider hiring an outside firm to help you with an area in which they are intimately familiar, and use your time and resources elsewhere (on more profitable customers, for instance)?
- Putting some distance between yourself and/or your office staff once your customer becomes delinquent is generally considered to be more professional. This may, in turn, increase the likelihood that the customer will return to you, on your terms, in the future. Do your best to avoid burning bridges – use a professional to represent you.
- Delegating responsibility for collection of delinquent accounts to professionals outside your organization should remove concern that your collection techniques may violate state or federal law.
- Failing to pursue delinquent accounts (or pursuing them ineffectively) may attract more delinquent accounts as “word may get out.”
- In many jurisdictions, corporations must be represented in court by an attorney (there is no such thing as a pro se corporation in many jurisdictions), so “do it yourself” may not even be an option.
Tips for before you get a customer
IT’S CLEAR THAT IN TODAY’S ULTRA-COMPETITIVE BUSINESS ENVIRONMENT,
companies which place too many demands on prospective clients can lose the sale. Yet companies which are too lenient in extending credit or in pursuing delinquent customer accounts receivable can become easy targets for non-paying customers, which threaten the company’s profitability, and, sometimes, even threaten the company’s continued existence.
It’s a balancing act, to be sure, but I offer some suggestions which may help – you can decide which ones you can implement without risking customer alienation.
1. Require completion of a comprehensive credit application; possibly require submission of a nominal payment for processing (or as a deposit or retainer which you can credit against the first sale), or submission of a voided check by the customer to you.
WHY? You want to obtain asset information, particularly bank information, in order to be able to enforce a judgment, if necessary, at a later date.
2. Obtain personal guarantees, if possible, particularly on new enterprises.
WHY? Enforcing a judgment on a business without assets (or one which has ceased to operate) is fruitless. In addition, you may not be aware that the business has UCC filings, mortgages or judgments outstanding, all of which can put you far down the creditor list. While an individual can also be without assets, with liens, or can die, or can file for bankruptcy, it is to your advantage to have the option of pursuing the individual; it is simply an additional source of payment, and, if the customer’s company
goes bad, it may be the only source.
3. Get customer signatures on all appropriate documents, even if only by fax.
WHY? Certainly, oral contracts are valid. However, they are enormously difficult to prove, particularly when the other side is looking to avoid payment. If you don’t obtain the signature, and you eventually sue the customer, you should not be surprised if the customer asserts that there is no contract, or that the contract is not as you think it is, or that you failed to live up to the contract in some way (by raising affirmative defenses or even a filing a counterclaim for damages against your company), in order to buy
more time, or to obtain a result which is more to their liking, through advantageous use of the legal system. Get the signature, set out to defeat the credibility of bogus defenses, and hopefully you will see more of your money sooner.
4. Obtain a social security number or employer identification number (EIN) for your customer before extending credit.
WHY? If the customer’s account becomes delinquent, you will only be able to do credit reporting if you have this information. Also, having this information makes it somewhat easier to “skip-trace” those who move without leaving a forwarding address, and also makes it somewhat easier to locate their assets in the post-judgment phase of the case.
5. Do not accept a Post Office box as the only customer address. Get a street address as well.
WHY? Suit papers cannot generally be served on a P.O. Box. Even though the customer prefers to receive mail there (I even prefer to receive mail there), they obviously are not conducting their business inside the box. There must be a physical location, and you are entitled to know where it is. Then, before extending credit, you may correspond with the customer at that address, if you wish, in order to verify that it is current. This way, if the customer closes the P.O. Box, you have another way of finding them.
6. Include terms on your invoices or bills (or, better yet, on your credit application) which allow you to charge “18% per annum or the maximum interest rate allowed by law, as well as reasonable attorney’s fees (of at least 20%) and court costs on all past due balances.” Get a customer signature on the document(s) which contain(s) these terms.
WHY? Under the law in most jurisdictions, you can only charge these amounts if you can prove that the customer accepted these terms. Otherwise, you have to accept the “statutory” interest rate (usually 6%) and cannot look to the other side for payment of your attorney’s fees. The ideal scenario is to obtain a customer signature on each document which sets forth these terms; but even if you don’t, you should include these terms on bills, invoices and statements, and consider obtaining a “Proof of Mailing” from the U.S. Postal Service to prove that you mailed these documents and that the customer never objected to their content. Even if you don’t intend to collect these additional amounts, you can use the possibility that the customer may eventually be found to be responsible for these amounts, in order to settle the matter without negotiating away the principal balance owed.
7. Consider taking a security interest in your customer’s property (especially if you are selling them this very same property)
WHY? Although this will cost some money to set up, this can put you in a better position to collect relative to “unsecured” creditors, both in the regular court system and in case of your customer’s bankruptcy.
8. If at all possible, obtain a spouse’s signature or guarantee when extending credit to a married individual; similarly, obtain a parent or guardian’s signature as a guarantor, whenever possible, especially when furnishing goods or services to a minor.
WHY? In some jurisdictions, including Pennsylvania, for example, it is very difficult, if not impossible to enforce a judgment against a married individual when all of his/her property is owned jointly with the spouse. You may have to wait until the death of one spouse or divorce to collect your money. In the case of a minor, in nearly all jurisdictions, a contract with a minor is “voidable” by the minor – meaning, in plain English, that you could provide goods or services to a minor, and the minor could declare that the transaction is an unenforceable contract. It’s always a better idea to have “backup” people accept written responsibility for payment.
Remember, as much as you want to respect the customer’s wishes in order to make the sale, you should give consideration to the notion that if the customer refuses to submit to some or all of the above suggestions, it may be an indication that the customer knows that it cannot live up to your demand
of timely payment. This is your chance to evaluate whether you feel that this customer will be an asset or a liability to you.
You can even turn this hesitance into a selling point. Here’s how:
Prospective customer: “I don’t know about all of these terms. It seems like you don’t trust me. I don’t need this; I’ll just deal with your competitor.”
You say: “I respect that you have a hard time with these terms. Our company is committed to ensuring that we do not carry delinquent accounts. It’s not that we don’t trust you, it’s that we have to be fair to all of our customers by having them on the same payment terms. I’m sure that you want us to give
you the best price terms that we can offer, and to give you the best service that we can offer, and with these terms, we are affirming our commitment to our customers that they will not have to bear the burden of non-paying customers. Besides, if you are current in payment, you’ll have nothing to worry about.”
Tips for after you get a customer, but before (or during) the time a customer becomes delinquent:
1. Make photocopies of (or scan) checks used by customers in payment on any invoice or bill. If this is impractical, you should do it for all new customers, and then verify that this information is still accurate when subsequent payments come in.
WHY? Bank information (as well as other asset information) is crucial to enforcement of judgments. This small investment of time, to record information which is in your hands for only a short period of time, can pay great dividends later.
2. Turn over delinquent accounts for outside collection quickly – after the first broken promise or refused or unreturned telephone call.
WHY? There is a significant drop-off in the collectability of accounts after 90 days past due, and then again after 180 days. In fact, a survey by the Commercial Law League of America found that the chances of collecting an account placed after 90 days is 72%; after 180 days, 44%, and after one year, 29%. While it is true that turning over accounts comes at the expense of a fee, you should view this step as a necessary one, where you hire experienced professionals to do something for you, in order that you may spend your valuable time and resources on more profitable customers. Not only are successful collections like “found money,” they also serve as a message that your business is not an “easy mark,” and will hopefully deter future delinquencies, not only from the customer in question, but also from all of your current and prospective customers.
Also, there are practical concerns about being able to successfully document and prove a collection case after significant time has elapsed (i.e., your staff may change, your record-keeping may call for the purging of accounts, the customer could relocate). Most important of all, the statute of limitations may bar a collection action after the passage of too much time from the date of contract (as little as three years in some jurisdictions, as long as fifteen years in others).
3. Always credit customers’ payments to their oldest invoice or bill (unless they specify otherwise in writing).
WHY? This goes directly to the statute of limitations issue. Let’s assume that you have a relationship with customer which goes back over ten years, and that this customer was never current in payment, yet made consistent late payments so that the size of the past due balance remained relatively constant, on average, through time. If you credit payments to the newest invoices, you will have a delinquency which is over ten years old, and thus, time-barred by the statute of limitations. If, however, you credit payments to the oldest invoices, you will technically have a zero balance (even after adding finance charges on a monthly basis) as of approximately the date where the total of most recent purchases, when added together from most recent to oldest, equals the total balance due. This will invariably produce a more recent date for the start of the delinquency, which, for these purposes, is to your advantage.
4. Get delinquent customers’ promises to pay in writing.
WHY? If your customer promises now to pay at some point in the future, this can only be viewed as an attempt to “buy time.” While it may be true that your customer does not have the money at this time, use this situation to your advantage, by agreeing to wait a short time (no more than 30 days), but only if your customer puts this promise to pay in writing. Remember, each stage of conducting business consists of exchanging something of value; when a customer becomes delinquent, this temporarily upsets that balance of exchange. In order to avoid being totally at the mercy of this customer, you should set out to continue the “give and take,” rather than pleading for payment. Remember, you can always say “enough is enough” and file suit – you are doing your customer a favor by not doing so, and you should be rewarded with a favor in exchange.
If you don’t obtain this promise in writing, and you eventually sue the customer, you should not be surprised if the customer asserts that you failed to live up to the contract in some way (by raising affirmative defenses or even a filing a counterclaim for damages against your company), in order to buy more time, or to obtain a result which is more to their liking, through advantageous use of the legal system. Get the promise in writing, set out to defeat the credibility of bogus defenses, and hopefully you will see more of your money sooner.
5. Consider sending a survey to customers after you have completed your work, but before payment is due.
WHY? First of all, this is good customer service. You may want to include a business reply envelope, and perhaps even offer a gift certificate on the customer’s next purchase in exchange for sending back a completed survey. This survey is especially useful for first-time customers, or existing customers who suddenly purchase a “big ticket” item. Beyond the customer service aspect, you will learn early on if there are any perceived problems from the customer’s point of view, and you may be able to utilize a favorable survey or even lack of a response as evidence of customer satisfaction if a dispute occurs later.