As we leave the recession and hopefully enjoy another period of sustained growth and economic good times, the last few years provided reminders on methods to help collect accounts receivable, or to avoid them.
The following summarizes some techniques that may help your business.
Pre-qualify the customer before you start work. If you are concerned a customer is a credit risk, it might be best to politely decline the work. While this can be hard to do, especially when building a new business or when things are slow, unpaid invoices or difficult customers are seldom worth it. It can be more productive to reward your good, loyal customers with your attention, skill, and efforts than taking time to deal with difficult customers.
Identifying and limiting your interaction with difficult customers sometimes requires asking for money up front and requiring a written promise to adhere to your schedule, pricing, and standard terms and conditions, before you start work. It can be a bad practice to start work, invest time and money, and then ask for payment or to sign a contract promising to pay.
Assess the risk of not getting paid and the repercussions before you start work. Not every transaction requires the cost of a specially drafted, multi-paged, written contract. But you may want customers (especially new ones) to sign written standard terms and conditions before filling their order.
While standard terms and conditions can include a variety of terms, they often include a period (e.g. 30 days) in which payment is due or you are entitled to a 5 percent late fee. Some businesses switch this around, and give a 5 percent discount for timely payment.
Terms and conditions can also include the payment of legal fees and costs, if collection efforts start, and clause placing venue for any court action in the county where your business is located. A venue clause is especially important if you deal with customers outside your state or county. Without it, you may have to sue in the state or county where the customer resides.
Without a written fees clause, a court may not be able to award you legal fees and costs, if you hire an attorney to collect a debt. However, the inclusion of a legal fees and costs clause should be done only after consideration. If you include the clause, do not prevail in your lawsuit, you may owe legal fees and costs to the customer.
If you default in your performance on the terms and conditions, a court might apply the legal fees clause against you, increasing your liability exposure and reducing your leverage if things go bad.
Bill with pride. It sounds simple, but businesses lose income because they do not bill. And it can be a bad practice to discount billings even when the customer complains. If you pre-qualified the customer, managed the risk of nonpayment with written terms and conditions appropriate to the task, and did good work, you should expect full and timely payment.
Good customers will usually appreciate your work for the agreed price, and pay without complaint.
Follow up on delinquent receivables. While collection calls are often not popular to make, they are essential. Unless some effort is put into collection, the debt will likely go unpaid. A detailed description of the art and legality of debt collection are beyond the scope of this article, but below is one system that may help you collect:
• Be nice. Initial nastiness can backfire. The customer may have honestly forgotten to pay, or might have a reasonable cash flow issue causing a short delay. If you are too aggressive, the customer likely will not return and your reputation might be damaged.
• Be nice and firm. If the customer does not return your initial calls, or misses the promised payment date, a follow up call and/or letter is important. It is another reminder of the debt due, and gives you a chance to remind the customer of the terms and conditions they signed before you starting work. If the customer honestly forgot to pay, there may be no harm in a more firm reminder of their obligations.
• Make a final clear demand for payment. At this point, the bill is hopefully not more than 60 to 90 days past due and you have made at least two efforts to collect. It is likely time to make a final clear demand for payment with a set deadline and statement of the anticipated repercussions if payment is not made. Some businesses threaten credit reporting, but this can have negative consequences and hamper your ability to pay.
The workout. Sometimes the customer simply needs more time to pay, but the size of the debt is too large to just wait and hope for p ayment. If so, it is important to have the customer affirm the amount due and promise to make structured payments (e.g. monthly payments).
You might also ask the customer to pledge collateral to secure their promise to pay. Collateral pledges are not simple, and may require special help to create. An example is a signed promissory note affirming the debt, structuring payment, and a security agreement by which the customer pledges assets you can seize if it breaches the terms of the promissory note.
Sue when it makes sense. If the customer has assets, suing to force payment may make sense. Often you may not know if assets exist. There are services you can hire to provide you with information. The costs and quality vary. If the customer has no assets, it may not be worth the cost or effort to sue. You are spending good money after bad.
There are a number of options when amicable debt collection efforts fail. Some include filing suit in Superior or District Court, starting a small claims action where attorneys are normally not permitted, or hiring a collection agency.
The current small claims limit in Washington State is $5,000. If the amount you seek is greater than this amount, you cannot file a small claims action.
Securing a judgment is often just the first phase to debt collection.
The judgment is the court order confirming the debt is due. With it, you have options. Most commonly, you can seize assets, get a judgment lien on real property, and garnish wages or bank accounts.
A judgment, however, does not guarantee payment. The customer may file bankruptcy or simply have nothing to seize.
Brian A. Walker is a debt collection attorney with Ogden Murphy Wallace PLLC representing businesses and individuals in commercial, business, and real estate litigation and transactions.