Collecting Debt: Contract, Quick Action Are Key

Q: Last year I did some engineering work for an incorporated client with whom I had successfully worked on a cash-on-delivery basis for a number of years. We had a good business relationship, so I extended him $3,000 credit. I billed him in February and August of 1997 and he still hasn’t paid. When I ask him about payment, he tells me about his financial hardship and personal integrity and angrily demands that I trust him. What are my options for getting at least part of the money? I have carefully documented our communications.

--Paul Nicholas, Burbank

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A: I specialize in debt-collection matters and sit as a judge pro tem in Small Claims Court and in Superior Court on small-claims appeals. I have learned that rule No. 1 for any small business is never work without a written contract that specifies the terms and conditions of your employment and compensation. That way, if things do not work out, you have an enforceable document. Also, it puts your clients on notice that they are dealing with a business relationship rather than a personal one. They will tend to approach their obligations differently when they know that.

If you did have a written contract with this client, it should have specified the method by which you were supposed to get paid and a plan for what would happen if you were not paid on a timely basis. Typically, contracts state that if you are not paid by a certain date (say, 30 days after completion of the job) interest charges are attached. Such contracts also include a clause stating that attorneys’ fees will apply if you have to resort to legal measures to get payment.

Rule No. 2 in this situation is that as soon as your client fails to pay up, you must take immediate action. Once a client uses your services and moves on to other projects and other payments, paying you becomes less and less of a priority--particularly if you are not staying on top of the situation. Also, asking for money becomes embarrassing and there is a psychological issue that has to be overcome the longer the situation drags on.

I usually advise businesspeople to send a friendly note reminding their client that the payment is late. Don’t come on too strong at first, particularly if there is a personal relationship involved. If 10 days pass without a response, make a telephone call asking about the late payment and mentioning that you too have payment obligations and need the money. Ask your client when you can expect payment, then send a follow-up letter stating the date by which the client has agreed to make the payment and include a self-addressed, stamped envelope in which they can send it.

If your client claims a hardship and says he can’t pay you right away, try to collect a minimum of 25% immediately and work out a payment plan for the balance. Perhaps he can make small payments every 15 days until the balance is paid off. Again, memorialize any agreement you make verbally with a written follow-up letter and self-addressed, stamped envelope.

There are cases in which your client simply does not live up to his obligations and thoroughly breaches your honor. At that point, you send him a warning letter specifying exactly what action you intend to take--and then do it immediately, even if it costs you something. You should be able to file an action in Small Claims Court, if the amount in dispute is less than $5,000, for around $75, including the filing fee and the costs of a process server. When your hearing comes up, you will need to show the judge a copy of the contract, a copy of the invoices you have sent and any supporting documents that show what work you did and why the fee you charged was reasonable. If your client’s business is incorporated, you will need to seek payment from the corporation, not from your client personally.

Even if you get a judgment against your client, you may have trouble collecting it. That’s when you will need to consult with an attorney who specializes in debt collection, which can be a complicated matter. The good news is that most of these attorneys work on a contingency basis, taking a portion of what is ultimately collected as their payment rather than asking you to put money up front to hire them.

--Stephen Dem, attorney

specializing in creditor/debtor

matters, Encino

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Q: I am the owner of an event-planning business that specifically targets couples. I plan romantic evenings and weekends for my clients, who use my service for marriage proposals, honeymoons, birthday celebrations, anniversaries and other special occasions. My problem is in the area of marketing my service. I have access to a business journal directory. Would mass mailing work with these services? Is there a better way to reach the target market of couples who can afford my services ($275 and up)?

--Lisa Davis, president,

Heart 2 Heart, Los Angeles

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A: Before you consider how to reach potential new clients, you may need to better define who those people are. Analyze your current customer base, looking for information like gender, age, profession, geographic location, the event they used your service for (10th anniversary, 40th birthday, etc.) and how they heard about your business. What are the “buyer values” these customers are looking for? Is it price, creativity, convenience?

Once you’ve honed in on a customer profile, you can identify avenues that will help you target similar prospective customers. You can also evaluate whether the various lists in the business directory fit your customer profile.

Rather than mass mailing, consider focused mail that will reach people more inclined to use your service. Then make sure your mailing communicates the message that is most likely to appeal to them. Finally, remember your most important list: Those to whom you’ve already sold. Offer referral discounts both for the party referred and the referring client. Also, make use of a contact information management program or tickler file that will prompt you to send out reminders when your clients’ next birthday or anniversary comes around again.

--Sharon Berman, principal,

Berbay Corp. marketing

consultancy, Tarzana

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If you have a question about how to start or operate a small business, mail it to Karen E. Klein, c/o the Los Angeles Times, 1333 S. Mayflower Ave., Suite 100, Monrovia, CA 91016, or e-mail kklein6349@aol.com. Include your name, address and telephone number. The column is designed to answer questions of general interest. It should not be construed as legal advice.