A lot of clients have problems collecting from their customers. Most of my work involves recovering that money. Over time, I have developed a series of techniques that clients can use to help improve their collection rates, save money (by not having to pay me) and increase cash flow. Here are a few:
- Use a professionally drafted contract or promissory note. For one thing, the mere fact that a note or contract appears to have been drafted by an attorney gives the customer the subtle impression that you have an attorney on your side. This alone will cause them to take you more seriously, and therefore, more likely to pay accordingly. You may spend a few hundred dollars - or for larger transactions - a few thousand - but if you do hundreds of thousands - or millions - of dollars in transactions every year using the same form contract, a small investment in a well-drafted contract easily and quickly pays for itself.
- Make sure you provide that the customer in default is liable for the costs of collection and attorneys' fees. In North Carolina, you are not automatically entitled to attorneys' fees just because you had to hire an attorney to collect a debt. There are only two ways to get them: either by a specific statute that grants them to you, or by contract. Since you control the terms of your contract, it makes sense to insert a brief clause - even a single sentence - providing that if the customer ever defaults, the customer must pay collection costs and attorneys' fees. You might be surprised by how many contracts do not provide for collection of these costs.
- Define default. If you are going to implement #2 above, you should also have a "Definitions" section that defines exactly when the customer is in default. Often on things like open accounts,for example, it can be difficult to tell if the customer is in default, or just running a high balance. Rather than let a judge decide, make it clear in your contract: all invoices are due within X days of mailing, or the customer is in default. Or if you are running an open account, define default as any balance exceeding X dollars that is not brought below X dollars within Y days of first exceeding X dollars.
- Know Your Customer. It's not enough to get a representative to sign a contract. You need to have a specific entity on the contract that will be liable for the debt. A lot of times I will see a contract signed by "Sam Signer as agent for Gulf Bay Dreams". Only there is no actual company called "Gulf Bay Dream"s. That may be the name of a project under development, but the actual company might be called XYZ, Inc, dba Gulf Bay Dreams of Tallahassee. If the contract only says "Gulf Bay Dreams" and you end up in court, you're going to have the extra task of having to prove that the "Gulf Bay Dreams" you are suing is in fact one in the same with the one who signed your contract. The problem gets worse when you go to the Florida Secretary of State website and find that there are 53 companies in Florida with variations on the name "Gulf Bay Dreams", engaged in everything from propane wholesaling to fencepost repair. Get the right name on the contract the first time around and you cut your risk dramatically.
- Don't ever let them forget that you are on top of things. You don't have to be nasty about it, and in fact you shouldn't be; but if you are shipping goods on a net-30 basis and day 31 rolls around and you have neither been paid nor contacted by the customer, make sure someone gets on the phone at 9:01 am on Day 31 to find out the status of the payment. The techniques for handling this are highly variable, as some client relationships are more delicate than others, but you should have a calendaring system in place to notify you the minute any account or contract is in default, and have someone available with the time and tact to handle the situation. With collections, the maxim "the squeaky wheel gets the oil" is absolutely correct.