Credit Where Credit’s Due : Collecting bad debts can be a lengthy process. Prevention is the better strategy.
Debt collection.
The words themselves have an ominous sound.
Yet, most small businesses are plagued with uncollected bills, which can hurt an otherwise healthy business. Attorneys and others who specialize in debt collection say even the boldest entrepreneur may have trouble demanding money owed him.
But collecting money from customers or clients does not have to be an onerous task if you develop a strategy, according to Reid L. Steinfeld, an attorney who specializes in collections at the Encino law firm of Weissman & Weissman.
After 10 years of collecting money owed a variety of businesses, Steinfeld has become a strong proponent of preventive medicine when it comes to debt collection.
The first step is to insist that the new customer fill out a detailed credit application unless he or she plans to pay cash on delivery. By demanding certain information up front, serious problems can be avoided later, Steinfeld says.
“At the beginning of a relationship, everyone loves each other,” Steinfeld said. So this is when the small-business owner should collect all the financial and personal information needed to decide whether to extend credit.
Businesses can draft their own credit application or buy a standard form at a stationery store and adapt it to fit the company’s needs.
The purpose of the form is to find out:
* With whom has the company had business dealings before? Insist on a list of contacts, addresses and phone numbers, and be sure to verify references.
* Where does the company have its bank accounts? What are the branch addresses and account numbers?
* Does the customer or the company own any property? Where is the property, and is it mortgaged?
* Can the debt be secured with a tangible asset such as the equipment you are selling the company or some other item of value?
* Is the business owner willing to provide a personal guarantee for the money owed, even if the company is incorporated?
Then, before extending credit, verify everything on the application. Start by calling the companies listed and ask how the company seeking credit pays its bills. Check the owner’s or company’s credit rating through TRW or Dun & Bradstreet. Have the Secretary of State’s office run what is called a “UCC (Uniform Commercial Code) search” to determine whether the company has any secured creditors. This affects how and when your company would be paid off if the other business fails.
Steinfeld also suggests adding a line or two on the credit application which states that any litigation stemming from the transaction must be filed in the city where your business is, rather than where the customer has his or her business. This will make life easier if you end up having to sue the company to recover your money.
To avoid disputes about whether goods were received, Steinfeld recommends following up each order with a brief confirmation letter detailing the products or services you provided.
What if you have checked the customer’s references, called his bank and assured yourself that he is a good credit risk--and he still ends up owing you money?
“It becomes a race,” said Steinfeld. “The longer you wait, the harder it is to collect.” (See graph.)
If you have not been paid during the normal 30-, 60- or 90-day payment period, first write a letter requesting the money you are owed.
Then have your credit manager or other responsible person call the debtor. Based on experience, Steinfeld said debtors will either refuse to take your calls or launch into a long list of excuses about why they cannot pay you.
If they make excuses, Steinfeld suggests saying you are not interested in hearing them. Tell the debtor you sold him something in good faith and that you expect to be paid promptly. Tell him you have a business to run and your own payroll to meet.
“You have to be firm and positive,” said Steinfeld. If the debtor is unwilling to work out a payment schedule, you may be forced to go to court.
At that point, most business owners turn to their attorney for help. If the debt is under $25,000, a business owner can seek help in municipal court. If the debt exceeds $25,000, the claim can be filed in superior court.
“You must take a strong legal position because debtors are much more sophisticated and know how to play the game better than ever,” said Steinfeld.
If it is time to play hardball, Steinfeld said your attorney can help you obtain what is called a “prejudgment writ of attachment.” A judge will issue such an order if he is convinced that you have a valid claim against the debtor. This type of court order permits you to freeze a company’s assets and prevent any disposition until there is a hearing on the dispute.
“The threat of attachment is very powerful,” said Steinfeld. He said many debtors pay up immediately after receiving legal notice that you are going to court to attach their assets.
“In our experience, the debtor either files for bankruptcy, calls to make a deal or hasn’t got the money and doesn’t care anymore,” said Steinfeld.
He also reminds business owners that any three creditors can force a business into involuntary bankruptcy, but that can be an expensive proposition because of the legal fees involved.
“It’s always best to try to make a deal because you can lose in court,” advises Steinfeld.
Just how much money do businesses owe each other?
The Commercial Collection Agency section of the Commercial Law League of America keeps track of debts by polling 64 commercial collection agencies quarterly.
In the first quarter of this year, commercial receivables reached a record $720.6 million, represented by 450,000 claims, according to Bethesda, Md., attorney Gordon Calvert. The total dollar volume dipped to $715.9 million, represented by 396,620 claims, during the second quarter of this year. Calvert said the figures reflect the financial health of U.S. businesses and their ability to pay off their debts.
