CHOOSING CUSTOMERS OR CLIENTS
Sometimes the best decision that can be made about a prospective customer is to decline to provide goods or services. Standardized credit evaluations techniques need to be in place to analyze the credit worthiness of a prospective debtors and, to the extent that it does not violate state or federal credit regulations, also use your common sense or gut instincts. Don’t accept a prospective business transaction as worthwhile if it is likely that part of your costs will be the unreimbursed costs of attempting to get paid. Also some people, even if they timely pay, are more trouble to do business with than they are worth if they behave as if they are your only customer and frequently complain.
Often there may be a tension between an organization’s marketing/sales department and its credit department. Frequently, the sales staff wants to sell to everyone and credit only wants to sell to those who don’t need credit. There must be a balance that periodically gets reviewed.
Maintain Adequate Records
RETAIN COLLECTION INFORMATION. Make a photocopy of debtor’s check. Record the debtor’s employment information, social security number, and driver’s license number. The more of this type of information you maintain, the easier it is to collect if you have to turn the file over to your collection attorney. Most of this information should be collected initially; some may be collected as you do business with the debtor.
Developing adequate record keeping systems can go a long way in preventing bad debt from developing. Things you need to know:
a. The type of customers that are not paying. Determine if there is a particular branch or line of products or services that you provide that result in collection problems
b. Did something exist that should have caused you to decline the potential business relationship before the debt was incurred? If so, establish procedures to prevent future occurrences.
c. Could the debt have remained manageable if certain safeguards were in place? Was there a point when the debt should have been reviewed by the appropriate department before the debt became too large?
d. Carefully document the debtor’s promises. Often, it is advisable to send a short letter to the debtor specifying exactly what their promise was.
e. When payments are due. Maintain an adequate calendar so that the receipt of promised payments are reviewed on a timely basis. Be sure to notify your attorney if you receive direct payment on a file that was earlier referred to the attorney.
f. Maintain records for future. The client may return someday and documentation concerning complaints, payment history, etc. should be available before you again decide to do business with the client/customer or decide on the amount of a required deposit and credit limits.
Standardize billing and collection procedures
Collect as much as possible as quickly as possible, and maintain good relations with customers. At 30-60 days overdue, every debtor should receive a personal letter (see below) and a follow-up phone call. By 90 days overdue, it is safe to assume that the debtor doesn’t care about good relations and you should stop wasting time and discontinue offering additional credit and further minimize the costs and risks of collection by turning the file over to your collection attorney.
FORWARDING SERVICE REQUESTED. This should appear just beneath the return address on all envelopes you send to debtors. Without that request, bills will be forwarded to a debtor’s new address and you will not be notified that the debtor has moved. Ultimately, the forwarding information expires and you will have a stale address.
SPRA. Keep your collection letters short. Some experts recommend the SPRA approach: (Situation) Your account is past due. (Proposal) Your November payment needs to be made. (Reason for Response) You want to protect your credit rating. (Action-Deadline). Please pay by Wednesday, December 7, 2011.
ABIDE BY DEADLINES. If you tell a debtor that if they don’t pay by the 10th you will then refer the account to your attorneys, be sure your attorneys have that file shortly after the 10th. Debtors will not take you seriously if you demonstrate that your bark is worse than your bite.
a. 1st Overdue billing (30 days):
After an appropriate amount of time has passed for the client to receive the letter, follow up with a phone call to politely inquire about payment. Authorize appropriate person to enter into payment arrangement if payment in full is to be made within next 90 days. If longer, payment arrangement must be approved by supervisor. Always follow up with letter to confirm.
b. Second Overdue billing (60 days):
If no payment has been received by the next billing cycle, send second standard letter. Calendar each file for 10 days; if no payment has been received, call the customer personally. If payment agreement is reached, confirm this with standardized agreement letter.
c. Third Overdue billing (90 days):
If no payment has been received, send third standardized letter (to inactive customers only- there should be no active customers who continue to increase debt unless payment agreement has been reached and confirmed in writing).
Refer to collection attorney on timely basis.
A collection attorney will often get results where in house contacts have been unsuccessful. If your collection attorney works on an hourly basis you will have less reason to delay in turning the file over. As a general practice, never wait more than 90 days to refer the file to your collection attorney.
Close uncollectable files
It may be painful to accept, but some accounts are simply uncollectable. Take your losses and center your attention on files that you believe may pay off. If you work uncollectable accounts, you will inevitably not place the appropriate emphasis on working collectible accounts with the diligence they deserve. Close uncollectable files, especially if the amount is small. Spend time working files that have enough at stake and where the debtor appears to be collectable. Don’t hold the file too long before referring to a collection attorney. Chances of successful collection reduce with the passage of time.
Choosing a collection attorney
One way to avoid bad debt is to have your attorney review your initial contract with your customers/clients. A properly drafted contract may help avoid later problems and reduce the costs of collection by including entireties language, venue provisions, and procedures for objecting to the alleged inaccuracy of invoices.
This office generally works only on an hourly basis so that you are more likely to turn over files before they are stale and while the chances of collection are still reasonably high. Otherwise you may be tempted to retain the file too long because you are attempting to avoid paying 30 -50% to an attorney or collection agency.
Once we have an ongoing relationship with a client we will develop a good feel for how the client wants its debtors treated. That helps us when speaking to debtors by attempting to resolve the case in a manner our client will be happy with. Except with specific authorization, we will not settle your case. Therefore, we will contact our client before accepting a settlement proposal or payment plan.
Because collections are a major part of our practice, we know collection law and will abide by deadlines. An attorney who does not give prompt attention to your collection accounts may do more harm than good by not aggressively pursuing collection while you have discontinued your collection efforts because you have turned the file over. Additionally, an attorney who is not familiar with the technicalities of the Federal and State laws pertaining to debt collection may expose you to civil liability.