Handling Debtors Who Don’t Pay

Being a nice guy almost drove Frank Mendicina out of business.

Three years ago, customers of Irwindale-based Select Copy Systems owed him about $450,000, and half of his accounts receivable were 90 days late.

“I was making money, but I couldn’t get my hands on it,” said Mendicina, who started out as a copier salesman about 20 years ago.

He knew that unless he collected the money people owed him and tightened up his credit policies, he could lose the business he had purchased in 1981.

As the economy slows, what happened to Mendicina is happening to small businesses nationwide. If your debtors are waiting longer to pay you, you are probably not paying your bills on time, either. Unfortunately, this ripple effect throws more small-business owners into financial jeopardy.

In fact, the cash-flow squeeze is the No. 1 concern of 5,000 small-business owners recently polled by D & B Reports, Dun & Bradstreet’s small-business magazine.

And debt collectors are busier than ever. In the third quarter of 1990, business owners turned over $757.6 million in receivables to collection agencies affiliated with the Commercial Law League of America, compared to $678.1 million in the third quarter of 1989.

Gordon Calvert, executive director of the League’s Commercial Collection Agency Section, said the 432,950 claims averaged $1,787 each. In 1989, the total dollar volume of commercial receivables reached $2.8 billion, up from $2.6 billion in 1988, Calvert said.

Collecting money is getting tougher too. According to Calvert, 53% of the CLLA members polled felt that claims turned over to agencies in the third quarter were less collectible than claims handled in the first half of 1990.

Even if money is tight, you can improve your cash flow, according to Leonard Sklar, author of “The Check is NOT in the Mail” (Baroque Publishing, $29.95).

Sklar, who teaches seminars on how to improve collections, believes that business owners get into trouble because they are afraid that, if they demand payment on time, they will lose business.

“You probably would have lost the customer anyway, so waiting longer only prolongs your agony and your costs,” said Sklar, adding that most businesses hold onto unpaid accounts nine to 10 months.

He advises business owners to view collecting debts as a business transaction--not an emotional experience. One easy way to reduce your collection problems is to have a clear, written credit policy. Having a policy doesn’t mean you can’t make exceptions. But you can’t expect your customers to play by the rules if they don’t know them.

Once you discover you have a problem with your accounts receivable, it is essential to take action immediately .

“If you send out two bills and get nothing back, first ask for it all to be paid immediately,” Sklar advises.

To convey a sense of urgency, try sending out bills twice, rather than once a month. It may help to stamp urgent, personal or confidential on the envelope to attract attention.

To encourage creditors to pay up, Sklar recommends setting up an amnesty period for your oldest unpaid accounts. This works by offering a 25% to 30% discount off the amount due if the debtor pays within 30 days.

Sklar also suggests taking a positive approach to debt collection by reminding people that they can save on finance charges by paying now. Remind them, too, that paying up will reduce their anxiety and maintain their good credit record.

For Select Copy System’s Mendicina, admitting that the business was out of control was key to finding a solution. A high school dropout with no formal business education, he decided to hire a strong financial person to complement his expertise in sales and marketing.

Mendicina credits Andrea Pagano, an energetic Harvard MBA who previously taught credit analysis to bankers, with turning the company around.

“When I got here, it was really a nightmare,” recalls Pagano, who serves as general manager and vice president of operations. “The biggest challenge was to make enough money to afford to clean up the accounts receivable.”

After reorganizing the service department, she tackled the mountain of accounts receivable. The company sent strongly worded letters to creditors and threatened to sue some of the biggest corporations in Southern California. Some delinquent accounts were turned over to lawyers or collection agencies. Convinced that some accounts were a total loss, Pagano encouraged Mendicina to write them off.

“I wrote off about $300,000 over the last 2 1/2 years and that hurt,” Mendicina said. “Nobody wants to lose business, but what good is it if people don’t pay you?”

Today, the company’s credit policy is among the toughest in the copier industry. If you call for service, the call is first routed to the accounting department to see if your account is current. If you owe the company money, they won’t send a technician out unless you agree to have a check waiting.

“The way we do business is highly unusual in the copier business, but we feel a few happy customers are better than a lot of unhappy ones,” said Pagano.

Select Copy Systems, which sells, leases and services Toshiba copiers, has 130 employees and posted sales of $11.5 million for the fiscal year ended June, 1990. The firm has offices in Glendale, Laguna Hills and Carson.

“Nobody enjoys asking people for money,” Mendicina said. “But, it’s your own fault if you don’t keep current.”

“The Check is NOT in the Mail,” is available in major bookstores or by calling or writing Leonard Sklar at Sklar Seminars. Outside California, the toll-free number is (800) 682-8017. In California: (415) 340-1770. The book is also available by mail: Baroque Publishing, 4 West Fourth Ave., Suite 501, San Mateo, Calif. 94402. The cost is $29.95, plus $1.75 shipping and 7% sales tax for California residents.

Black Entrepreneurs Plan Conference

Black entrepreneurs are gathering Saturday for the Pasadena Black Expo 1990. The event, sponsored by the Pasadena Journal and others, will run from 10 a.m. to 5 p.m. at the Masonic Hall, 200 S. Euclid, Pasadena. Admission is $5.

THINGS TO KNOW BEFORE GRANTING CREDIT

* Is the customer an individual, partnership or corporation?

* What are the names and addresses of all partners or owners?

* How long has the business been around?

* What is the name of their bank? Account numbers? Loans outstanding?

* Ask for a detailed financial statement. Refusal to provide one is an immediate red flag.

* Ask for the name of three business references and call them up to check on the customer’s bill-paying history.