Numerous books and seminars promote various theories of collecting accounts receivable, but basic strategies are often the most effective. Many of these ideas may seem simple, but don’t be deceived by their simplicity. When a collection account ends up in an attorney’s office, I find many clients failed to take the following precautions.

Establishing a written credit policy. Most companies do not have a written credit policy and those that do fail to adhere to the policy on a consistent basis.

Getting to know their customer. While this appears to be a simple and basic element of any relationship, many clients do not know who their customer is. By that, I mean, is your customer an individual, a proprietorship, a partnership, or a corporation.? In our business world, many entities use fictitious names and acronyms for their businesses. It is important to clearly establish who is responsible for the obligation. This can become especially confusing when you are dealing with partnerships.

Planning for the worst. Many clients fail to plan for problems before they happen and therefore, they fail to include necessary provisions for dealing with problems which may arise in the future. Planning for an account to be past due or planning for litigation is essential. Typically, most clients have a discount for early payment but fail to include provisions for attorney’s fees, interest or late charges for a delinquent account. Delineating these provisions before an account becomes past due ensures that there are no misunderstandings later.

Utilize personal guarantees when appropriate. Many new and unknown companies that do not have a credit history will attempt to avoid personal liability by establishing a corporate account. While the laws providing for corporate liability were clearly intended to shield corporate shareholders, directors and officers from personal liability, many new or unknown companies do not have the credit worthiness to avoid personally guaranteeing their obligations. It is critical that a personal guarantee be obtained, especially for new and unknown corporations or partnerships.

Securing an agreement for payment of attorney’s fees and interest. In order to recover attorney’s fees, most courts require a written agreement signed by an authorized representative of the customer. As with other terms of a credit relationship, it is imperative that an agreement be obtained before the relationship has deteriorated. Also, include a provision allowing you to recover interest at the highest allowable rate. Without such a provision, you may be limited to the statutory rate which in most instances can be significantly less than the highest allowable rate.

Using a comprehensive credit application. All of the items listed above, and more, should be contained in a comprehensive credit application. If not, you should revise yours, then use it. See Does Your Credit Application Protect You?

Using forbearance agreements and security agreements when appropriate. Many times a security agreement can be used to create a lien on the equipment or merchandise sold to protect you in the event of a default. Additionally, if an account has become delinquent, a forbearance agreement can be utilized to re-establish the debt as well as a liquidation schedule for payment of that debt in lieu of suit. This clearly delineated liquidation schedule will avoid problems later, especially regarding the quality or fitness of the merchandise which was sold; leaving the only issue in dispute to whether or not the debtor lives up to the terms of the forbearance agreement.

Keeping correspondence. Many clients fail to appreciate a letter’s value either from themselves to the customer or from the customer to the client. Many letters which are received from customers can be incriminating regarding admitting the liability in question. Additionally, I recommend that clients follow up any phone conversation or oral agreement with a letter of confirmation. Also, if you receive a letter from the customer which you do not agree with, it is important to respond in writing, setting forth your reasons for disputing or disagreeing with those contentions.

Acting Promptly. Of all of the rules or strategies we have discussed, perhaps the most important is acting promptly once an account is clearly in default. The best predictor for determining whether or not an account will be collected is the age of an account. Statistically, 90 days after the account is past due, you have less than a 75 percent chance of collecting it. That percentage rapidly decreases with each passing month and at the end of one year, you have roughly a 25 percent chance of recovery. It is critical that accounts be properly monitored during the first three months of aging and a prompt decision must be made to refer an account for collection once a predetermined deadline has expired. Invariably, most clients tend to provide the debtor with one last opportunity in the hopes that tomorrow, or next week, or next month, payment will be made. Don’t fall victim to this technique used by all sophisticated debtors. Act promptly.

By following simple and basic collection strategies, most clients can maintain an effective control of their accounts receivable and give themselves an advantage if the account does need to be placed for collection. Planning for problems before they arise, in most instances, will prevent small problems from becoming larger ones. Additionally, when a clear understanding as to the debtor/creditor relationship is established, much of the emotion is removed and therefore, the matter can be dealt with solely on a business basis. Once it is clear that an account is not going to comply within a reasonable time frame for payment, do not procrastinate, take action.

Contact us for any questions about your receivable problems.