We represent a fair number of small businesses which either extend short-term credit to customers or sell goods and services on open account. We tend to hear from these clients more during times of economic downturn, when customers become “slow pay” or in some cases, “no pay.”
What can a small business do to protect itself against exposure to bad debts and uncollectible accounts? Here are a few suggestions culled from our experience:
- Religiously review your accounts receivable, not only to uncover past due accounts, but also to identify accounts having a balance which has grown unusually high or over a short period of time.
- Encourage customers to pay promptly by offering a discount for early payment. Common discount terms include a 2% discount for payment within 10 days. A larger discount may provide an even greater incentive.
- Be wary of selling substantial amounts of goods on open account where the customer is likely to have a primary lender having a “blanket lien” on the customer’s inventory. Should the customer default or go into bankruptcy the lender may obtain a prior lien on the goods which you sold to the customer on open account! This can be prevented by recording a security interest on inventory to secure open account purchases.
- Don’t become partners with your customer. Donald Trump had a huge advantage negotiating with his banks because he owed them so much money. The more a single customer owes you in relation to the size of your business, the more leverage that customer will have if things turn sour.
- Promptly send reminder letters when timely payment is not forthcoming. Establish a procedure to follow up by telephone. Encourage customers to pay promptly based upon the notion that prompt payment allows you to provide competitive pricing and service. Set deadlines for making delinquent payments and enforce those deadlines.
- Above all, communicate with your customers and clients. It is human nature to avoid discussing problems, especially overdue bills, but maintaining a dialogue can often be the best route to getting paid. Consider granting extended payment terms allowing the debt to be repaid over a reasonable period in installments.
When all else fails, we are here to help clients collect old and unpaid receivables, and we would like to think we are good at it. If you follow the above steps, however, you may not need our services at all.
Call us if we can help you in this area.
— Kevin Palmer