Collecting Receivables in a Weak Economy
More and more in recent years, customers fail to make payment when due. As the economy struggles, the way you address your receivables can determine whether your own company survives or falls victim to the economic challenges.
In 30 years of helping people get paid for what they do, I have seen recession and recovery, inflation and deflation, good times and bad times. This article addresses collection practices and makes observations on collecting receivables in a weak economy.
Because I am a lawyer, I must caution you that this article does NOT provide specific legal advice for you to follow. The comments provided are general. Your situation may vary. This article should help you learn some principles. To apply those principles to your situation, please seek advice from your legal counsel.
The first step to solving your problem accounts begins much earlier. Your credit-approval process should include identifiable, specific steps. Follow them. Obtain good information at the outset, when the customer wants to obtain credit. Use a credit application that includes correct, complete legal name(s), bank and other references, addresses, bank account and lender information. Obtain a personal guaranty. Request a financial statement. Do your homework. If that customer does not pay, you then possess useful information to maximize your recovery.
This economy challenges all businesses. Some survive. Some don’t. Identify problem accounts early. Follow a pre-established system to invoice, send statements, and follow-up. These steps should gradually increase the pressure and urgency. Establish a timeline and procedure for moving that problem account to a third party. Use a collection agency or attorney. Establish criteria for these steps and follow them.
Holding accounts longer in a weak economy hurts your efforts in two ways. First, the economic times place a premium on your time. You have more accounts than ever to collect. You are overloaded. That situation threatens the effectiveness of your most effective tool—persistence. Second, when your customer suffers financially, others will be knocking on their door for payment. Don’t be left at the end of the line. Be the squeaky wheel.
In good times or bad, some accounts will not pay. Reasons include inability to pay, unwillingness to pay, or complaints about the quality of the goods or services. Identify the first category early. Do what you can to verify the customer’s situation. Ask for financial statements and tax returns. Check UCC filings. Obtain copies of bank notes. When you confirm that the company is not able to pay regular expenses, that the secured lender holds a perfected security interest in all assets, and the individuals have no assets, write off the receivable. Spend your time on something productive. Leaner, more efficient processes apply to collections as much as to manufacturing. You can’t afford to be sidetracked from potentially productive accounts.
As an alternative, and during the process above, use creative methods to resolve. Obtain a signed note. Use automatic withdrawals for payments. Obtain collateral. Use joint checks or mechanic’s liens if permissible (be very diligent here; times to file liens are very short). If not already done, obtain a personal guaranty. Find out names of customers of your customer. Help them collect, if it will help you collect.
Unwillingness to pay poses a different issue. The justifications vary, but in the end, if the customer simply refuses to pay, without cause, move the case forward. In these times, the unwillingness to pay may stem from financial uncertainty. Don’t allow the customer’s uncertainty to paralyze your efforts. If you have exhausted other efforts, send the account to collection or to an attorney. Raise the price of poker and force the customer to face the music. Apply legally permissible force to overcome the recalcitrant customer.
When customer dispute accounts, investigate. If valid, adjust and resolve. If a dispute is not valid, document the facts, send to the customer, and follow up to resolve. Provide a deadline and enforce it. If no response, take the next step.
Collecting in a good economy requires vigilance, systems and perseverance. In a good economy, you may be able to extend leniency on payments; in a weak one, you can’t afford that luxury. Ratchet up your efforts. Diligence becomes critical. Your worst enemy in collecting during weak economic times could be your own willingness to let it ride. Resist that temptation. The harder you push, the more you will succeed. Newton’s First Law of Physics states that an object at rest will stay at rest unless a force is applied. The same concept applies to receivables, especially in a weak economy.
Louis Wade is a lawyer with the Kansas City firm of McDowell Rice Smith & Buchanan.
P | 816.960.7323
E | lwade@mcdowellrice.com
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