Effective Collection Strategies
In the current economy, many businesses have seen a sharp rise in non-payment and collection problems. Businesses can minimize the incidence of unrecoverable accounts and reduce the cost of collection by establishing sound practices from the beginning of a credit relationship with a customer.
Prior to a transaction, when a customer seeks credit, the credit terms should be reduced to a written agreement, which the customer signs before any goods or services are provided. The agreement should contain clear language setting forth the time when payment is expected, a provision for interest on invoices not paid on time, and an agreement by the customer to pay the costs of collection including attorney’s fees in the event of default. This is also the time to ensure that the customer is identified by the correct legal name (if it is an entity), to acquire a social security number or employer identification number, and to obtain trade references and banking information. Each of these pieces of information will be useful if collection becomes necessary. In the case of a corporation or other entity, only the most creditworthy should be permitted to receive credit without a personal guarantee of payment from the owner or some other individual. A personal guarantee provides back-up financial responsibility if the debtor entity goes out of business. Other useful terms to be included in the credit agreement are time limits for making claims about the quality of goods or services, and consent to jurisdiction of the local courts.
Sellers should maintain records of purchase orders transmitted by the customer. After default, the quantity, timing, or other details of the order may be disputed by a customer, and their P.O. provides the best proof of the contract. As the customer makes payments on the account, sellers should keep copies of the checks to track the banking relationships of the customer. Proof of delivery, acknowledgment of completion of services, or acceptance of goods or services should be obtained in order to document satisfactory performance.
When non-payment occurs because of the customer’s financial difficulty (as opposed to a dispute over delivery or quality of goods), it is often useful to engage the customer in a dialogue for extended terms. Offering flexibility to a customer may lead to at least partial payment on an account, thus minimizing the exposure, and it is also an opportunity to reduce the amount and timing of payment to a separate contract or promissory note. Once a payment agreement has been reached, it can limit the ability of the customer to later assert a dispute with the goods or services. If collection litigation becomes necessary, this will streamline the issues by avoiding certain defenses. The use of a cognovit promissory note (in Ohio) can minimize legal costs by permitting the creditor to obtain judgment immediately upon filing of a lawsuit.
Having a written credit agreement, purchase orders, and proof of delivery provides the evidence necessary to obtain judgment, often without the need of trial. A properly drafted credit agreement permits the seller to recover court costs and attorney’s fees, which discourages customers from engaging in an extended legal battle over frivolous matters. Obtaining personal guarantees often make the difference between collection and non-collection. Keeping updated records of a customer’s banking relationships often make it possible to recover payment from the customer’s bank account by court order.
By establishing a simple credit procedure at the beginning of a relationship, a seller can ensure that it has the best chance to collect in the event of nonpayment.