1. LEARN MORE ABOUT THE BUSINESS:
When you allow a business to pay for goods or services at a later date, you are extending credit. A bank will not extend credit to a person or a business without getting some basic information to see if they are “credit worthy”; or a good credit risk. If you are considering extending credit to a business, you should feel comfortable in asking for the same type of information that a bank might ask for.
You certainly would want to find out what type of business it is; a corporation, partnership, or a sole proprietor, or an LLC. If it is a corporation or an LLC, is it in good standing, and what is its charter number? Who are the officers or members of the corporation? Is the business doing business under an assumed name? If so, they should be able to provide you with a copy of their assumed name certificate. What are their physical and mailing addresses, if different?
Have they provided you with credit references? Find out from the credit references if they are a slow pay, or not. The more information you learn about a business before you extend credit, the better. In some businesses, credit is only extended after there has been a business relationship established for a few months. Remember, if a bank would not lend them money, why should you?
2. PUT EVERYTHING IN WRITING:
A contract is an agreement between parties. It lets everyone know what is expected of them, and what is expected of the other party. If the contract is not filled out properly, or portions are left blank, then it raises questions about what the obligations are of each side.
3. KEEP COPIES OF FINANCIAL RECORDS AND CHECKS:
When a business pays for goods or services by check, you should always run a photocopy of that check and keep it with your records. By maintaining copies of checks and other financial records, you can learn a lot of valuable information.
Most banks will not print checks listing an assumed name unless they have been provided a copy of the assumed name certificate for the business. Therefore, the name that is listed on the check may be very helpful to determine what type of business you are dealing with.
Often times a business will be conducted under an assumed name without ever filing an assumed name certificate in the county. Many times the checks are listed in the name of the sole proprietor, the partnership, LLC, or the corporation, without listing the name the business is conducted under.
There have been several instances where an individual files an assumed name, but the check shows that it is actually a corporate or LLC account. If a lawsuit is required, it is necessary to know who all the potential parties are. Be aware that an “Inc.”, “Corp.”, or “LLC” after a name does not guarantee that the business is a corporation or LLC. Check with the Secretary of State or Comptroller’s office to see if they are really the entity that they purport to be.
It is also helpful to know if the business changes bank accounts, and where the business banks if a judgment is obtained. As a general rule, money in a business checking account is subject to garnishment to pay a judgment.
4. THE OLDER THE CLAIM, THE LESS COLLECTIBLE:
When claims are allowed to get stale, they are more difficult to collect. This is true for several reasons. Most often, if the business has not paid the bill, it is because of financial difficulty. If the business knows that you are not aggressively pursuing collection of the debt owed, your claim becomes less of a priority than other creditors who have aggressively pursued theirs. It is the old “squeaky wheel” situation; the one that squeaks loudest usually gets paid.
Also, if the business is having extreme financial difficulties, there may not be enough money to pay all the bills before the business either closes or files for bankruptcy. The claims that are pursued earlier are more likely to be paid before the business hits financial bottom.
Businesses also do not pay their bills when there is a dispute regarding the goods or services provided. If the dispute is dealt with early on, there is a better chance of resolving it amicably and maintaining the business as a good customer. By the time the claim is stale, there is usually very little willingness on the debtor’s part to discuss the problem and seek a resolution.
Further, if a lawsuit is required, the more time that passes, the more difficult it is for witnesses to remember specific facts. Often documents and witnesses are no longer available. Our office recommends that accounts be turned over for collection when they are less than 60 days delinquent.
5. REMEMBER, IT IS STRICTLY BUSINESS:
When businesses are having financial problems, they feel like they are fighting for their financial lives, and often do not use the best business judgment. Debtors can be very creative in their excuses, but the most common is still, “the check is in the mail”. Nobody likes to be lied to, but getting into an argument with the debtor is counter-productive.
You should establish a protocol for dealing with all outstanding receivables, and strictly follow the procedures for all cases. It is helpful to let them know that it is not personal, but that your business has certain established procedures that you must follow; i.e. if the payment is not received in your offices by a date certain, it will be turned over to their attorney for collection. Follow through, and turn the file over for collection if the payment is not received by that date.
We have often collected on delinquent accounts for our clients, and have been able to maintain a good business relationship between our clients and the debtors, when the debtor has cash-flow difficulties and is embarrassed to discuss it with the creditor. The file is not being turned over to the attorney for collection because you are mad at the debtor for not paying the bill. It is strictly business, and the file should be turned over to the attorney for collection because you have obligations you need to meet.
For the article on “How to Improve Collections, Part II”, please click here.