BY GARY KAVULICH and MAX KREMER
Anthropologists have taught us that people didn”™t always have money in our current form ”“ coins and paper ”“ but still actively engaged in the trade and sale of goods and services. However, even participants in a pre-civilized economy had to consider risk.
Similarly, in a more advanced and complex economy, you have to minimize your bad debt. Bad debt is just that, “bad.” It has cash flow implications, a possible impact on your company”™s ability to obtain and retain good credit and it sometimes even has a serious impact on the health of your business.
There are some essential, proactive steps you can take to ensure that your loss of revenue is minimized because of your clients”™ or customers”™ unwillingness or inability to pay.
Prior to actually providing your service or goods, make sure that you obtain detailed information from your new clients and customers. Be sure the correct legal name of the corporation or partnership is obtained. It may say “ABS Services” on their invoice but the actual name of the company is “ABC Services, Inc.” Learn whether it”™s a corporation, an L.L.C. or a sole proprietorship.
The FEIN or tax identification number can also prove critical to collection of your arrearages later on. That number, like an individual”™s social security number, is often what many steps in the collection of your monies are based on.
Oftentimes, customers make decisions about which companies they can put off paying and which ones they need to pay exactly on the due date. Make sure your company lets your customers know that you should be paid first by maintaining a consistent billing and collection process. Your invoices and statements should have a clause providing for the delinquent payer to pay for any and all costs associated with collection of the debt by an agency or attorney on your behalf.
Your goal as a business owner is to make and retain good relationships with customers. This includes treating those customers fairly but firmly during times when they may be experiencing financial difficulties. The key in accomplishing this goal is to establish a set of expectations throughout your billing process. That process should begin with the monthly invoice or statement and then a late notice and, if still necessary, a 10-day demand letter. If that doesn”™t work, it is then time to work with a collection service. If this is part of your regular process of accounts receivable, your established clients will understand that this is regular procedure, not personal and will be less likely to be offended.
There, in addition to regular monthly or even weekly invoicing, are other measures to address client payment issues. An advance retainer is one method. Here you require your client to pay a 10 percent to 25 percent or more of the total contract amount prior to the work being performed. Another method is prepaid disbursements. This eliminates some risk to your own cash flow. One other way to minimize your risk is client progress payments. You can invoice at certain, specific points in the project. These progress payments would be outlined in and paid per the contract or agreement.
The last, and often most reliable, method to ensure customer payment is a personal guaranty of a principal or officer of your corporate client. Unless your client has been around for decades or has sterling credit, an invoice backed by a personal guaranty usually commands more attention than one which is not. Such a guaranty can become invaluable if the company goes out of business and/or if the account ultimately goes to collection.
RMFP
Regular billing ”“ a statement should be sent on a regular basis. This provides you with the advantage of knowing early if the client will be disputing your fees and whether the issue can be resolved or you should discontinue your services.
Monitoring payment history ”“ when you monitor and record payment trends of clients, you can often discern patterns that may place your fees and goods at risk.
Follow up on late payments ”“ as discussed earlier, if you see that an invoice is a week or month overdue, immediately begin the various steps of the collection process.
Placement of accounts ”“ if the account is more than 90 days past due, consult your collection professional. A few more months of calls and letters most likely will not result in payment after the previous months of calls and payments.
The older a debt gets, the less likely you are going to collect the full amount. According to the U.S. Department of Commerce, debt begins depreciating at a rate of 5 to 10 percent per month. As time passes, the amount of money you”™ll receive decreases drastically. Teaming up with a high quality collection agency or attorney should have a decisive impact on your ability to collect your money and greatly improve the profitability of your company.
Gary Kavulich is the founding member of LMK Recovery Services, www.lmkrecoveryservices.com, practicing in the creditors”™ rights field since 1996. Max Kremer is the regional director of sales/marketing. Kremer can be reached at mkremer@lmkrecoveryservices.com or direct at (914) 222-4030, ext. 7006.
