Given the current economic climate in our county, I am repeatedly asked this question by my clients in some form or another: "How can I collect on all of these past due accounts?" This is a very serious question, and for many of my clients, they have never had to pursue past due monies before. Many of my clients are small to medium businesses which regularly service smaller communities. Once upon a time, the mere possibility of a negative reputation in the local business community was enough to "coerce" clients into paying, which is why most of my clients were able to send out a simple invoice, net 30 days, and forget about it. It was a given that the invoice would be paid an overwhelming percentage of the time. Unfortunately, as it seems for a majority of small business owners, those days are gone. It is becoming increasingly more common for accounts to be 60 and 90 days overdue without even hearing from the customer. This whole situation was summed up in a conversation I recently had with one of my clients. He was totally frustrated and quite disappointed in his customers that they were not paying their bills on time, a concept that was totally foreign to how he operates his business. He summed up the economy with the old phrase "It seems more and more that people are robbing Peter to pay Paul these days." To which I immediately responded, "Yes, but you have to do everything in your power to be Paul, rather than Peter." One of the biggest concerns to many of my clients is the fact that they are in a service related industry. The concern is that there are a finite amount of customers out there (even less nowadays), and they want the best of both worlds. They want to collect their money and also keep the customer, making a "no holds barred" approach to collecting money an option of last resort. This is not as large of a concern for major companies because their size allows them to pull customers from a much greater geographic area; but for the small business owner, the customer base is much more finite making every customer a valuable asset, not readily tossed aside. The simple truth of the matter is that many business owners have a lot within their power to prevent some accounts from going past due. Additionally, the small business owner needs to have a streamlined system in place that, should an account become past due, the account gets acted upon quickly with proper safeguards in place that minimize the amount of time, energy and money expended by the owner in chasing his money. The first preventative step deals with the owner's terms, assuming that they have terms of course. I am constantly surprised by the amount of business owners that simply send out an invoice with no terms whatsoever, just based on the understanding that invoices should be paid within 30 days. There are two basic terms that can have a significant impact on when (and if) your invoice will be paid. The first is the often overlooked late charge. Many owners do not have them, and most of the ones that do have inconsequential late charges of 1%, hardly a coercive term. Make sure that your invoice and/or terms state that there will be a late charge assessed after 30 days, and make the charge significant with a minimum of 5%. I have seen owners get even more creative by escalating the late charge by the amount of days late, e.g. 5% from 30-60 days late, 7% 60-90, etc. Additionally, these charges only become effective if the owner utilizes them, after all, a hollow threat is really no threat at all. This is more of a long term approach, as your customers need to realize that you will in fact issue and hold these charges accountable. This will not happen overnight, but over the course of time, customers will begin to realize they cannot simply put your bill at the bottom of the pile because your bill will continue to grow with interest. Conversely to late charges, another term which exudes a response to pay timely is an incentive clause. These terms reward prompt payment, such as 5% off the invoice if paid within 15 days. In this economy everyone is looking to save money, giving them a reason to pay your bill quickly in order to save on expenditures is a wonderful motivator. The second major preventative measure deals with ease of payment by the customer. Making it easy for your customer to pay your bill is the single most important thing an owner can do. The two most significant tools you can utilize are credit card machines and payment plans on large accounts. Everyone knows that people are much more willing to swipe their credit card than to issue you a check. Start using a credit card machine and state on your invoice that you accept credit cards. You will of course have overhead with the machine and processing fees, but these pale in comparison to not getting paid at all. Plus, you can work these fees into your invoice to cover these added expenses. The second tactic is using payment plans. These should only be used on accounts with large balances and only with those clients you are certain will make the payments. You must be careful in implementing payment plans. You want to be relatively certain that not only will the customer make good on the payments, but also that the timeframe of the payment plan brings the customer current within a relatively short period of time. Payment plans can have a positive mental effect on customers with large overdue accounts. Instead of them seeing a large overdue balance that is insurmountable, payment plans can be seen as attainable goals for the customer making it more likely to be paid rather than giving up on the entire balance. For these reasons, payment plans are not necessarily favored, but it does beat the alternative of not getting paid at all. These simple techniques can be utilized by the small business owner to alleviate collection problems before they even begin. Future articles will deal with what happens when these preventative measures are not fruitful, and additional measures must be taken.
About the Author
Ronald C. Isgate, Esquire is the Managing Partner of Isgate & Chiccarine, P.C., a full service law firm that concentrates its practice in Small Business and Real Estate law. Mr. Isgate can be reached via telephone at (215) 396-1020, risgate@isgatelaw.com. For more information please see our website www.isgatelaw.com.
