Times are tough these days, and it is common for a business to have growing Accounts Receivable, as clients stop paying or slow-pay. Businesses often experience difficulties in collecting monies owed to them by their customers and clients, and that is particularly true during a recession. Every business has experienced some difficulty in getting paid all it is owed. Unfortunately, many business plans are formed under the false presumption that a very low percentage of the business’ accounts receivable will go uncollected. That is usually a false presumption. The problem of collecting accounts receivable is not unusually. While a few bad debts might not doom your company, chasing clients for payment is a waste of time, effort and energy that should be spent on bettering and growing the business. If your business does not have a plan to avoid collection issues, your collections problems can prevent your business from growing and will always negatively affect the business’ profitability.
There are solutions. Your business can minimize the risks that your accounts receivable will become uncollectible. And as is usually the case, preventing the problem from occurring is far less costly than curing the problem once a client or customer fails or refuses to pay you for your goods and services. Here are a few suggestions to help you avoid much frustration and anguish in chasing clients and customers for payment-
Get It In Writing
It may sound elementary, but it is so essential that you memorialize your agreements with customers, clients and other businesses. Any change, termination or other modification of an agreement should also be in writing and signed by your customer. For example, in a construction context, a “Change Order” form may often be used. To avoid a variety of legal and tax trappings, all written documents, including your regularly used forms, should be reviewed by your legal counsel and tax advisors.
Get Paid In Advance
You should require substantial deposits and down payments before you begin ordering parts or using materials. And you should require payment-in-full before you begin performing services or relinquish control of your property. Remember that until your customer has paid you for a good, the customer is not entitled to the fruits of your labor. This rule may best be exemplified by the landlord who demands rent to be paid on the first day of every month during which the tenant will occupy the leased premises.
If You Don’t Get Paid In Advance, Get Security
This rule does not apply to every contract or business relationship, but many businesses fail to require security to reduce the risks of non-payment. In larger transactions, particular those involving the sale of movable personal property and real estate, the seller should demand a security interest in something of value. A mortgage, a recorded land contract, a mechanic’s lien and a lien on personal property are familiar examples of security interests. But many people forget that a business can agree to provide services, such as structural repairs to a house, and in exchange receive a security interest in an entirely different property, such as an office building, delivery truck or car owned by the customer. Or alternatively, that same business could require a security interest in the house, office building, delivery truck and car, or some combination thereof. Having a security interest may also improve your chances of recovery in the event the customer files for bankruptcy protection.
If The Customer is Credit Risky, Demand A Co-Guarantee
Never extend credit to a customer whom you fear is a credit risk. If a customer’s credit is bad or uncertain, require the signature of a co-guarantor who promises to pay the customer’s debt to you in the event the customer does not. Remember, however, that the co-guarantee is only as good as the co-guarantor is creditworthy.
If Your Contract Does Not Allow For Collection Costs, You Cannot Get Them
Indiana follows the “American Rule” that litigants pay their own attorneys’ fees. If you retain an attorney to collect a debt, you will pay the attorneys’ fees and most other collections costs. There are two exceptions to the American Rule- (1) there is a written contract allowing the recovery of attorneys’ fees, or (2) there is a statute allowing such recovery. In very limited circumstances, you might recovery fees if your opponent asserts a frivolous, unreasonable or groundless claim or defense. In short, include a provision in your contracts allowing YOU to recover your attorneys’ fees, collections and court costs. Never allow your customers the right to recover fees from you.
Never Trust That “The Check Is In The Mail.”
Your clients will promise to pay you, in hopes of delaying your efforts to collect. Do not be fooled by empty promises. Start legal proceedings as soon as possible and do not delay in collecting your money or retrieving your property. Read your written agreements to determine if you must give any notices or demands to the customer before commencing a collections action against the customer. The longer you wait, the more likely the customer will be difficult to locate; the customer will have been hidden his/her assets; or your property will have been destroyed, devalued or transferred to third-parties.
As a final suggestion, consult your attorneys as soon as you suspect difficulty in collecting a debt. Often a stern letter from an attorney on a law firm’s letterhead can have a dramatic effect on a delinquent customer. You also should consider consulting your attorneys to review your entire billing and collections processes. The Griffith Law Group has often assisted businesses whose agreements, leases and other forms were outdated or lacking important provisions which would allow the business to pursue additional remedies against a delinquent customer. If we can help you or your business, please contact us for a consultation.