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 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. If the customer refuses, I suggest you write to the Postmaster and ask for the street address under the Freedom of Information Act. 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."