10 Tips to Minimize Outstanding Receivables

By Howard B. Weber, Esq.

Turning accounts receivables into cash for your bottom line is crucial, not only during a recession but afterwards as well. Here are ten tips to guide your company going forward to help minimize the damage caused by outstanding receivables:

1) Take time to prepare an application for all new business clients. The application should ask for the legal and DBA names of the business, the bank the client does business with, names of the principals (if it’s a corporation or partnership), address, phone number and website, and the business tax ID number. Armed with this information, a business that has a client turned debtor greatly improves its chances of collection.

2) Photocopy checks you receive from a customer. These photocopies may become invaluable. Business checks can tell the name of the paying entity (if different from the name of client), the person who can sign for the company, the bank and the account number should you ultimately need to file a bank restraining notice. Note: If the signatory doesn’t indicate his title with the corporation he’s signing for, then under some state laws, that person may be individually liable for corporate debts.

3) Obtain a signed personal guarantee. Even when you trust that a business will pay its invoices, you should still get the extra security of a back-up personal guarantee to cover the debt, should they fail to make payment. If the customer objects, advise them that if they are so sure their company will make timely payments, then they aren’t really taking any risk by signing a guarantee.

4) Research clients who aren’t paying on time. When clients are late in payment, order a Dun & Bradstreet Report online to determine if all creditors of that business aren’t getting paid, or if it’s only you being ignored. This allows you to verify the debtor’s cries of poverty and to determine whether to take quick legal action to beat your fellow creditors to the funds. Or take a drive down to the business and see what’s going on. Does it look like they’re preparing to shut down—are boxes packed? Is there a “final closeout” sign posted? Find out if you need to act quickly before your debtor disappears or if you will be throwing “good money after bad?” If you are a secured creditor, you need to know where your security (i.e., equipment such as freezers, copying machines, etc.) is being moved.

5) Keep records of all invoices, contracts, purchase orders, bills of lading, and other agreements. These documents could become crucial in a collection issue were to go to trial. If any of the records were made on carbon copy or thermal paper which fades quickly, then scan or photocopy them in case you need a legible copy of them in court down the line.

6) Bill regularly and often. Act quickly on unpaid bills and resend bills frequently. This serves two purposes—it’s a constant reminder to the debtor that you intend to collect, and should the matter wind up in court you’ve given your attorney a chance to use a “book account” cause of action, which means he or she can establish that the debtor received these invoices and never objected, thereby helping to establish liability, resulting in a quicker recovery.

7) Advise debtor of discounts, offers and new products. If your business has an offer to entice new customers, you can also use it to encourage existing customers to pay their invoices. Getting paid and keeping the client is the goal.

8) Know what you are entitled to before you agree to settle. While settlements make good business sense, don’t sell yourself short. You may actually be entitled to more money than you think. For example, collection lawsuits may include court costs, interest from the date of default (which is currently given at the rate of nine percent in New York), and attorney’s fees. Your contract may also allow you to collect late fees, finance charges and penalties.

9) Find a good collection agency. Collection agencies send letters and make phone calls hoping the debtor surrenders to their persistence. They are most useful on high volume, low balance cases. Collection agencies charge a percentage of recovered money, typically between 15 and 30 percent. Make sure the collection agency you choose is a member of either the American Collectors Association or the Commercial Law League of America.

10) Find a good collections attorney. Like collection agencies, many attorneys handle these cases on a contingency fee basis (no legal fee due if no monies are collected). Here are some additional items to know:

* Filing a suit entitles you to ask for extra money, particularly interest, which may make the balance due significantly higher.

* You can enter into a settlement enforced by a court order so that if the debtor violates the stipulation, a judgment can immediately be entered.

* Prepare to pay legal fees if going to court. Creditors in the U.S. generally pay their own legal fees for money recovery (which is the not the case in many countries where the prevailing party gets legal fees paid by the losing party).

* Your lawyer can advise you where to bring a collection action. If the debtor is out of state and you sue him where your business is located, it’s more convenient for you. However, if you sue a debtor in his own jurisdiction, you will obtain a judgment in a state where the debtor has assets, which makes for a better chance of collecting. Debtors may also settle quicker seeing you are pursuing them in their own “backyard.”

Following the above recommendations will make your business more efficient at getting the money you deserve.

Howard B. Weber practices commercial law, collections and real estate in New York and New Jersey. He has contributed to Crain’s Business Week,The Free Press (a creditor’s rights magazine) and recently authored the New York section of International Commercial Debt Collection. He lectures extensively for the National Business Institute and for the Commercial Law League of America, among others.

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