Optimize Your Position For Collecting On Debts

(Originally published in The Business Journal)

In a challenging economy, small business owners need to make the most of every opportunity to collect what they are owed.

Fortunately, several state and federal laws allow for practical steps that can put business owners in a stronger position.

But to make these procedures effective, creditors need to follow the example of the Boy Scouts: They need to be prepared.

Here are some steps business owners can take to increase the likelihood that they will get paid.

First, know with whom you are dealing. It is important to have accurate information about the customer’s proper legal name and address.

Whether you are dealing with an individual or a corporation will make a difference in how and to what extent a debt can be collected. You need to make sure that you, your attorney or your collection agency is chasing the right entity.

A second step small businesses can take is to keep good records.  An accurate accounting of each customer’s debts and credits helps eliminate confusion over what is owed and when it was owed. Sometimes the legal remedy available depends on when the debt was incurred.

Third, know where your customers’ assets are. One of the simplest things a small business can do is photocopy checks from customers so that it knows where their bank accounts are.

If a customer is going to incur significant debt, a business may want to require that customer to disclose credit references, whether it owns any real estate or significant personal property, and banking information. This will not only help assess whether the customer is a good credit risk, but also will aid in the collection of debt should the customer fail to pay.

Watch for changes in the customer’s payment cycle. A change in the length of time it takes to pay bills may forecast financial storm clouds on the horizon.

Businesses should not be as worried about a customer who regularly takes 45 to 60 days to pay on a 30-day account as they should be about a customer who regularly paid in 30 days in the past but now stretches payments to 45 days, 60 days or longer. 

Once a customer has stopped paying, a small business should be aware that it has many remedies short of a lawsuit to try to collect the debt.  Direct contact with the customer will often yield results.

Creditors should be flexible. It may be preferable to get all of what you are owed over several months than to push too hard and get nothing.

Businesses should also be aware that the law may give them the right to hold personal property belonging to the customer, particularly if the debt arises out of manufacturing, improving or adding to that property.  Always check with your legal advisor as to what your rights to possession of the customer’s property are. Once you let go of the property, and lose your common law lien rights, it becomes more difficult to collect the debt.   

Finally, do not to wait too long before seeking professional advice from a reputable debt collector or attorney. As a rule of thumb, the longer the debt remains unpaid, the harder it is to collect. 

The financial condition of the customer may worsen, bankruptcy may intervene, or a host of other problems that would not have been faced early on may jeopardize payment if action is delayed too long.

Coombs can be reached at fcoombs@hhmlaw.com or at (330) 744-1111.