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Proven Strategies for Improving Collectibility

From the Desk of Attorney Don Leviton: Proven Strategies for Improving Collectibility

 January 10, 2013

“From the Desk of Don Leviton, Esq.” is a featured monthly article from Brown & Joseph’s General Counsel, Don Leviton.

Taking a few safeguards can improve your success when having to collect on your receivables. I have found that basic strategies are usually the most effective. In order to increase the effectiveness of your collection process, you should:

Have a written credit policy and follow it on a consistent basis.

Know your customer. Is your customer an individual, a sole proprietor, a partnership, or a corporation? Businesses often use fictitious names and acronyms for their businesses. It is important to clearly establish who is responsible for the obligation.

Plan for collection problems before they happen. Your credit agreement or application should provide for provisions for attorney's fees, interest at the highest rate allowable and late charges for a delinquent account. In order to recover attorney's fees, most courts require a written agreement signed by an authorized representative of the customer.

Use personal guarantees, especially when you are dealing with new companies that do not have a credit history and will try to escape personal liability by creating a corporate account. 

Have a detailed credit application. All of the above, and more, should be contained in a comprehensive credit application

If possible, obtain a security agreement that can be used to create a lien on the equipment celebrity gossip or merchandise sold to protect you in the event of a default or bankruptcy filing. 

Keep all correspondence between you and your customer. Letters or emails received from your customers may admit the liability in question. Phone conversations should be followed up with a letter or email confirming the conversation. A letter or email received from your customer that you do not agree with should be responded to delineating the reasons for the dispute. 

Most importantly, once an account is in dispute and the customer has defaulted you must act quickly. The age of the account will be one of the main factors that will impact your ability to be able to collect. Statistics show that 90 days after the account is past due, you have less than a 75 percent chance of collecting it. The percentage quickly shrinks every passing month and after 12 months, there is only a 25 percent possibility of collection. 

It is essential that accounts are closely monitored during the first three months of aging and an evaluation should be made without delay whether an account should be sent out for collection. 

Almost always, debtors will ask and creditors will afford a debtor a final opportunity to remit, hopeful that payment will be received the next day, or next week, or next month. This tactic is used by all debtors. Your most effective tool is acting promptly.

The strategies discussed above will assist you in managing your accounts receivable and provide for increased collection success if and when the account is sent out for collection. 

Contact us for any questions about your receivable problems.

Information in this article is provided as a matter of information and education only. It is not intended to provide legal advice or counsel. Do not take action in specific cases without full knowledge of the facts, and competent legal advice from your attorney.