By Brad Brelinski
In a down economy, collecting your accounts receivables (A/R) seems to get more difficult by the day.
You’ve done the work or supplied the product, and you should get paid for it in a timely manner—you deserve it. Here are some tips to consider to increase your collections.
Set up a system
It is imperative that you set up a system and stick to it religiously.
You may have A/R software that alerts you automatically when a payment is late, generates a form letter for you and sets a reminder to follow up with a phone call.
Or, you may have to set up this system manually. No matter which way you do it, stick with it or your customers will eventually realize they can get away with taking longer and longer to pay your invoices.
The level of aggressiveness will likely depend on your relationship with the customer.
If it is a former customer, you can obviously be more aggressive because you aren’t expecting more business.
They may be thinking the same thing—they can take longer to pay because they aren’t depending on you for products/services anymore.
If it’s an ongoing customer, it is a touchy situation because you want to keep their business, but you still have to get paid for your work.
If they try to set up a payment plan, do not reduce the principal amount outstanding, and always ask for an immediate payment up front as an act of good faith on their part.
If the customer wants to settle the outstanding debt for less than what is owed, request a lump sum payment at a reduced rate.
Cash in hand is usually better than a promise to pay in the future. As always, it is good to reduce the agreement to writing.
At a minimum, send a follow-up letter or email confirming the conversation and agreement and request they respond if your understanding is not correct.
Be prepared
For new customers, have them fill out a credit application or an informational sheet with relevant information to help you down the road if you have to collect.
You can copy checks they use to pay you so you know where they bank if you have to garnish an account.
Ask for social security numbers. The worst they can do is not fill them in.
If it’s a business and not an individual, include a personal guarantee for the owner to sign just in case the business is uncollectible.
Spend some time investigating the potential customer if it is going to be a substantial contract or relationship.
The level of investigation depends on the risks and money involved.
Unfortunately, some companies move from one supplier to another and leave companies hanging with unpaid invoices.
Speak to references or visit their facility to see what kind of shape it is in. For outstanding invoices, charge interest and late fees and hold them to it.
This may sound outlandish, especially in an economic climate where everyone is looking for ways to survive the downturn, but seriously consider not taking on customers if you truly feel they will be trouble down the road when it comes time to pay their bills.
In the alternative, if a current customer is too much trouble, consider letting the business go. I always say, it’s better to not do the work and not get paid than it is to do the work and not get paid.
You could spend your time on another project, or out looking for paying customers.
Get serious
When an account is past due, you have to realize at some point that what you are doing simply isn’t working, and look for alternatives.
At that point, you basically have two options: (1) a collection agency, or (2) an attorney.
Both options will usually cost a percentage of the outstanding debt, but no out-of-pocket costs except expenses.
Keep in mind that when it comes to business debt, every situation is different.
A collection agency typically does not employ attorneys, and therefore cannot pursue the matter in court in case the customer does not pay after a demand letter is sent.
An attorney can set up a system depending on your needs. A simple demand letter from an attorney tends to send the message that you are serious about collecting and the customer pays up.
Sometimes a lawsuit is inevitable, but unlike a collection agency, the attorney can bring such an action in court.
If a judgment is obtained, the attorney can exercise different options to collect the debt. Sometimes a customer will be difficult to collect from, and you and your attorney will have to get creative to settle the debt.
This is why having the personal information on the customer from the outset is so important.
Either way, you did the work or sold the product. You deserve to get paid.
Just remember, cash is king, and with cash flow so important with small businesses, staying on top of your accounts receivables is essential.
A sale is not complete until the receivable is collected. Don’t celebrate when you land a sale, celebrate when you get paid.
Brad Brelinski is an associate with Curtis and Curtis PC, a full service law firm located in Jackson, Michigan providing legal services and advice to individuals, families and businesses throughout mid-Michigan since 1901. Brelinski can be reached at brad@curtiscurtislaw.com or by calling (517) 787-9481.
