Know Your Customer’s Pressure Points
I recently concluded payment of a commercial claim for over 100% of the principal balance. It doesn’t happen very often in debt collection, so excuse me if I brag a little.
While conducting the client intake interview for the new commercial claim, the principal of the client told me that his customer was about to be sold to a very large company, for a large sum of money. The closing, he told me, was to be within one month. Based on that information, I knew that we could leverage the sale to our advantage.
Rather than sending out a demand letter and waiting for a week for a response, I suggested that we immediately begin suit and attach a copy of the filed Summons and Complaint to the demand letter. It worked beyond expectations and we received wire payment in full of the principal figure, together with accrued interest and court costs spent, within two weeks of the date of the letter.
6 Ways to Get Paid Faster
1. Don't delay the first phone call to the customer. Don't delay demands. A reminder that you are expecting payment should have the desired result. And call the accounts payment clerk, not the CFO. (The CFO or president of the company might transfer you to the A/P clerk to extend their time to pay.)
2. Ask for your money, as a matter of right. Don't apologize for demanding what is yours. It isn't necessary to spew fire during the telephone call, but it is imperative that the customer understands that you will not be put off further.
3. Get credit card information as part of your customer order system. Asking for credit card information as part of your credit granting process has the positive effect of weeding out the bad customers who aren't serious about paying.
4. Make sure your invoices are correct and complete. If you eliminate confusion, you eliminate reasons for delay in payment.
5. Put terms and conditions on your quotes and contracts. Include a penalty for late payment (finance charges) and an ability for you to recover attorney fees from the customer in the event of a default.
6. Understand your customer's payment cycle. If they issue checks on a fixed day of the month, time your invoice to arrive a few days prior to checks being cut. Invoices at the top of the pile might get paid first.
Basic Agency law provides that an agent can not be held responsible for the debt of the principal unless the agent specifically agrees to become liable, either jointly or independently. That agreement must be in writing and signed by the party against which you want to collect. The most common form of this agency is the General Contractor on a construction job. The supplier may think that it is selling to only the General Contractor. When the bills don’t get paid, what happens when the General Contractor directs the vendor to the owner of the property, claiming an agency defense. What if the owner is bankrupt or other circumstances dictate that the vendor can’t collect from that source?
Probably the best thing a vendor can do when working with an intermediary is to get a Guaranty Agreement from that person/entity at the time they begin to do business. I have had many clients whom I have represented tell me such a requirement would "get in the way" or "will kill my business". Think about the percentage of your accounts that go to collections. If it is relatively low, requiring a Guaranty from the intermediary might not make statistical sense. If your delinquency rate is high, you should take all steps to protect yourself. If you aren't getting paid, you won't miss the business from parties who refuse to sign a Guaranty or Indemnification Agreement and will actually save yourself time and money in chasing down and prosecuting bad accounts.
Ultimately, the vendor has to make an intelligent business decision on whether to require an agreement prior to doing work for a particular broker or intermediary. If you do require a Credit Application, please include provisions for the collection of finance charges and attorney fees in the event of a default. That will take the financial sting out of referral out to an attorney to collect your money.
Do you know who your customer is?
Often a Seller of goods or services is unsure who to pursue legally if payment is not made on their bill. The situation is common, especially when there is no formal Credit Application taken prior to the unpaid transaction. Is the person you contracted with an "agent" and insulated from personal liability?
An "agent", the party who entered into the contract for goods or services on behalf of a disclosed "principal" or "contracting party". The "agent" is not responsible for the unpaid bill, if the Seller knew who the agent was working for. The owner of a business might be considered an "agent" for the corporation she/he uses to organize her/his business. If a lawsuit was brought against the "agent", she/he might argue that they are not the proper defendant and seek to have the lawsuit dismissed against them.
However, there are exceptions to the Rule. A Seller can argue that where an officer of a valid corporation enters into a contract with them and does not disclosure its existence, the officer is personally liable on the contract. The law imposes a duty on the officer of the corporation to disclosure who the Seller is doing business with at the time of the contract formation.
Ten Terms Every Business Owner Should Know
1. acceleration clause - A provision normally included in loan document that gives the lender the right to demand the entire loan amount (principal plus interest) to be paid at once, in case the borrower fails to make payments (defaults) or gets into serious financial difficulties.
2. accounting method - A set of rules to determine when and how income and expenses are recorded. The two most common methods are accrual method and cash method.
3. cash basis accounting - An accounting method in which income is recorded when cash is received, and expenses are recorded when cash is paid out.
4. accrual basis accounting - A system of accounting based on the accrual principal, under which revenue is recognized (recorded) when earned, and expenses are recognized when incurred. Totals of revenues and expenses are shown in the financial statements (prepared at the end of an accounting period), whether or not cash was received or paid out in that period. Accruals basis accounting is employed by most companies except the very small ones (which use cash basis accounting).
5. actual cost - The actual amount paid or incurred, as opposed to estimated cost or standard cost. In contracting, actual costs amount includes direct labor, direct material, and other direct charges.
6. bad debt - An account receivable that is unlikely to be paid and is treated as loss. The ratio of bad debt losses and the open account (credit) sales is an indicator of the quality of a firm's collectibles, and the efficiency of its credit monitoring efforts.
7. balance sheet - A condensed statement that shows the financial position of an entity on a specified date (usually the last day of an accounting period). Among other items of information, a balance sheet states (1) what assets the entity owns, (2) how it paid for them, (3) what it owes (its liabilities), and (4) what is the amount left after satisfying the liabilities.
8. billing cycle - The number of days between one invoicing period (during which invoices are prepared and dispatched) and the next.
9. bottom line - Net income after tax. Also defined as what is left after all expenses are paid.
10. business growth - The process of improving some measure of an enterprise's success. Business growth can be achieved either by boosting the top line or revenue of the business with greater product sales or service income, or by increasing the bottom line or profitability of the operation by minimizing costs.