Non-paying customers. Delinquent accounts receivables. Bad debt. All are a bane to businesses. Chances are good that your company has experienced them already. If not, it likely will at some point, particularly with today’s economy.
“In these economic times, many companies are strained financially as their clients do not pay invoices or bills in a timely manner,” said Kevin Sutehall, a business and commercial litigation attorney in Hutchison & Steffen’s Las Vegas office. “Receivables that linger on the books hurt companies as they try to pay their own debts and fulfill other obligations.”
The upside, however, is you can take steps to collect past due income and minimize future bad debt. “When you have provided a service, you need to do everything in your power to collect what is owed you,” said Ronnie Sloan, president and partner of the Las Vegas accounting firm, Fair, Anderson & Langerman. “Most times you’re going to be successful, sometimes not.”
But how far should you go to get paid? If the expected benefits from a particular avenue of collecting outweigh the costs (staff time, money, effects on productivity), then consider it, experts said.
“The cost of the collection process is a business expense in itself,” said Ed Lubbers, founder and partner of Las Vegas-based Lubbers & Borg. “Only pursue to the extent that makes economical sense to you and your business. Otherwise, you may find that you’ll be putting your own business into a further financially stressful situation.”
“Some companies want to collect every penny due them at all costs because they don’t want the reputation of being businesses that don’t collect debts,” said Reno-based attorney, Bruce Beesley, partner of the law firm, Lewis and Roca, and leader of its bankruptcy practice group. “They tend to spend a lot more time and money on collecting and have worse results than those willing to be flexible.”
It’s ineffective to harass and threaten people, and litigate over small amounts, said Brett Axelrod, a reorganization bankruptcy attorney and a shareholder in the Las Vegas office of the law firm, Greenberg Traurig. “If you’re not listening to your customers and their issues, you’re too hoggy. What I always tell my clients is that pigs get fed, hogs get slaughtered.”
Collection Strategies
The likelihood you’ll collect the full principal owed you decreases exponentially as the account ages.
“Speed is key. If you’re looking at something that is 60 days overdue, you’ve a greater likelihood of getting 100 percent of that money. Once it gets to 120 days, you’ll be lucky if you get 50 cents on the dollar,” Axelrod said. The statute of limitations on debt resulting from a verbal contract is four years, from a written contract, six years.
Therefore, it’s essential that your accounts receivables are monitored constantly. Someone inside or outside your business should do this and apprise you of all past due accounts routinely, perhaps weekly, Sloan said. All accounts should be reviewed monthly.
“If you’re not paying attention, then your customers aren’t going to pay attention to paying you,” Sloan added.
Look for any changes in payment patterns, Axelrod said. Maybe a customer who’s always paid within 30 days has started paying late. Maybe a vendor’s checks suddenly are arriving from a different entity or are being signed by a different person. Heed these warning signs and act immediately. Call the customer and find out what’s going on.
“It’s always better to have frank conversations and develop a relationship,” Sloan added. “That will get you higher on the list of people they need to pay.”
The first step in addressing an unpaid, overdue balance is to call the client and try to collect. Sometimes the personal touch, in the form of a phone call from you or another principal, yields better results than one from an employee.
“Typically it’s always the squeaky wheel that’s going to get paid,” Axelrod said. “The worst thing you can do is be in denial. Whoever makes the most noise or is the most essential to the business operations is more likely to get paid than a creditor who’s passively just waiting.”
Don’t be eager to negotiate initially, but if the customer raises a legitimate issue, then consider haggling, said John Muije, attorney and partner with Muije & Varricchio, a Las Vegas business law firm.
Go into the call trying to get more, but have in mind the lowest amount you’ll accept and what terms you’re willing to offer to get it, Beesley said. That may be, for example, a payment arrangement in which the client pays $300 a month until they pay off the balance. As an incentive, you may agree to reduce their balance after they’ve paid a determined monthly amount for a designated time. Or maybe you offer to forego any late fees and interest. The goal is to settle on payments the client will be able to make. Be specific about due dates and amounts.
“You have to seek a win-win situation because some money is better than none,” Sloan said.
If you’d like to continue providing goods or services to a client who owes you a large sum, ensure you’re getting paid up front or on delivery, but also get money for the past due amount, Axelrod said. To secure the older debts, try getting some collateral via a UCC-1 Financing Statement agreement, which creates a lien against the debtor’s personal property. Other security options include a written guarantee from the principal or a letter of credit.
A forbearance agreement is also recommended when attempting to secure older debts. It stipulates new provisions—a repayment schedule and security requirements—for the client paying off the old debt and as long as they abide by the terms, you agree to reduce the total amount owed. If the client violates the agreement, the full amount, including late fees and interest, is reinstituted. This allows you to reward the client for paying and punish them if they don’t.
Communicate right away if a customer fails to follow through with a payment commitment, Sloan said. If they’ve agreed to pay you by the 10th of the month but don’t, call them on the 11th. Be cordial but firm in asking for payment. Perhaps even offer to pick up the check, if possible.
“Timely, consistent communication is essential,” she added.
Other tactics that can be used in-house are well-crafted collection letters and withholding service.
“Not only can the letter sometimes elicit payment or lead to dialogue with the debtor to get the debt paid off over a period of time, but the letter also serves to put the breaching party on immediate notice of your position concerning the contract that was breached,” said Matthew Hippler, a commercial and real estate attorney in Holland & Hart’s Reno office. “Also, the letter serves to document the origination of the dispute, which is important if the situation may eventually involve a lawsuit.”
For debt equal to or less than $5,000, try small claims court (www.clarkcountycourts.us, www.washoecourts.com), Beesley said. Ensure that whoever represents your company in court, however, is prepared and knows the facts of the case.
“If you go to small claims, you’re looking at out-of-pocket expenses and costs of about $100 plus staff time to fill out the paperwork and process it properly,” Muije said.
Consumer Debt
Consumer debt, as opposed to business debt, is incurred for consumable or depreciating assets that aren’t considered investments. Examples of consumer debt include medical bills, credit card balances, car and student loans, and store-financed consumer purchases. When trying to collect on consumer debt, companies can report delinquent accounts to one of the three credit bureaus, Muije said.
A federal law, the Fair Debt Collection Practices Act (www.ftc.gov), applies to pursuing consumer debt, but only to collection agencies (businesses pursuing payments on debts owed by individuals and businesses) and other third parties doing the collecting. It mandates that debt collectors can’t call consumers outside the hours of 8 a.m. and 9 p.m.; use profanity; threaten violence; contact neighbors, family and friends about the debt; and more. Those reported violating the Act face a $1,000 penalty and must pay the suing party’s lawyer’s fees.
Outside Resources
If you’ve made reasonable efforts internally to collect on an account and still aren’t getting paid, it’s time to seek outside assistance.
“Self-help only goes so far,” Muije said. “It’s much better to deal with somebody who knows what they’re doing, who can protect you on one hand and achieve your goals on the other.”
Consider sending old accounts to a collection agency. Some experts recommended passing them off at 90 days past due, others at 120, but the sooner, the better.
“They become out of your hands so you’re not putting company time and effort in trying to collect on them,” Beesley said. “If you get something back, it’s almost a bonus at that point.”
Collection agencies are ideal for collecting amounts of $1,000 or less and primarily retail and consumer claims, Muije said. They have resources and strengths typical companies and attorneys don’t. For example, they handle volume, have more experience with skip tracing, and utilize form letters, batch processing, automatic dialers and private investigators, among others. They have access to numerous databases for credit report, national property and other searches.
These firms typically charge a setup fee along with a percentage, typically between 25 and 50 percent, sometimes more, of any money they collect, Beesley said.
“Mean what you say, and say what you mean,” Lubbers said. “If you tell someone you plan to send them to collections, you better do it.”
For debt that exceeds $10,000, you may want to hire an attorney to try collecting it for you, Muije said. For anything less than that amount, it doesn’t make sense economically unless you can find a lawyer who works solely on a contingency basis. Those, however, are few.
“It’s not unusual for a lawyer to work on a 25 percent contingency with a 5 percent one-time, advance fee,” Muije said.
Consider filing for a judgment against the owing customer. With a judgment, you then may garnish 25 percent of their net wages, seize their bank accounts and more. You may execute the judgment as a lien against the debtor’s property so if they ever try to sell it, they first have to clear the debt.
“Be aware that some assets will not be recoverable even if you secure a judgment,” Sutehall said. “Nevada is relatively debtor friendly, and its law shields many assets from collection.”
“If a customer has defaulted on payment at the time you’re providing goods to them, you may file an Action of Reclamation to retrieve what you’ve already delivered to or sent them,” Axelrod said.
If you suspect a company is acting fraudulently, say distributing equity while debts are owed to creditors, you might pursue a receivership, Axelrod said. Such a filing requests that an independent, third party be brought in to manage the debtor’s assets and liquidate the company for the benefit of its creditors. This approach, however, carries with it the cost of paying the receiver.
Some companies, medical practices, for example, sell their accounts receivables on a contract basis to an agency called a factor to obtain cash before the accounts come due, Axelrod said. The factor assumes responsibility for collecting on those accounts and for any losses. It’s an expensive option but allows a company to receive money up front and unburden themselves from having to collect.
If you think it unlikely you’ll get paid on a specific overdue account, it’s a good practice to write it off your books.
“Write if off at the end of your fiscal year so you avoid paying tax on it,” Sloan said.
If you write $10,000 or more off of a customer’s account, you may send them a 1099-c form for that amount, Axelrod said. They then will have to claim on their taxes the total as income and pay tax on it. Again, consider if you really want to go this far before choosing this route.
Proactive Measures
Taking steps before accepting a new client helps to avoid collection problems later.
“In the current economic climate, it is more important than ever to know who you are doing business with and to understand the customer’s business,” Hippler said. “Unless you have a very good grasp of what financial situation your customer is facing, your business could be taking a risk by establishing a relationship with that customer.”
Before taking on a business as a new client, run its credit report, Axelrod said. If its credit is marginal, don’t work with them or require a deposit or retainer. Or ask for some type of security. Conduct a litigation search to determine if they’re being sued for failing to pay others. When you extend credit to a company, ensure your contract with them requires they give you annual balance sheets, profit and loss statements, and updated bank information.
“You have to choose your clients, when possible,” Sloan said.
In the case of taking on new client consumers, find out what their credit is like, Muije recommended. Discover how stable they are by determining if they’re employed, whether they own their home and how long they’ve lived in their current residence. Don’t sell to a consumer unless their credit is decent.
Bill regularly and on time, Sloan advised. Consider printing an incentive of some sort on your invoices. Follow through with any such promises or threats. If your invoices indicate you’ll assess late charges and interest on late payments, do it.
“The better your policies, the less likely you are to have problems,” Muije said.
