It is an unfortunate fact of business that from time to time one of your customers will not pay for goods or services you provide. It is a frustrating and sometimes helpless feeling that you have knowing that even though you provided a valuable product or service, for reasons beyond your control you are simply not paid. How do you collect your money? What follows are some techniques that will help you effectively collect your receivables.
Obtain Proper Documentation
First, you should obtain good information on your customer. There is nothing more frustrating than selling goods or providing services to a customer that you cannot find when it comes to collection. We, therefore, recommend that for every customer, you obtain pertinent information such as the customer's full name, including all fictitious business names, as well as their current address and prior addresses.
For sales made on an open account basis (that is, on credit), an open account or credit application is a must. The application should require the full name of the debtor; any fictitious business names; if an individual, a social security number, drivers license number, and date of birth; if a corporation, the name, address, and telephone number (both business and residence) of the officers and directors; or, if a sole proprietorship or partnership, the principals of the company.
Bank account information with account numbers and addresses of branch offices where bank accounts are maintained should be acquired. Trade references are also useful information. Quick phone calls confirming references can aid in rejecting false applications.
You should also request that your customer provide you with a recent financial statement. A statement audited by a Certified Public Accountant is best; at minimum, you should ask for a statement that has been prepared by your customer's accountant. If no financial information is available, be wary; it may indicate a company in distress. Where a company has been in business for a short period of time, there may be insufficient information with which to prepare a financial statement. In this case, you should obtain one from the company's principal(s).
Many publicly held companies are required by federal and state law to prepare annual reports which contain pertinent financial infor mation. These reports are on file with the Securities and Exchange Commission and/or the California Department of Corporations; and most companies will also provide a copy upon request. Obtain an annual report where available and study it carefully. Merely because a company is publicly held does not guaranty it has the financia l wherewithal to repay its obligations; observe the number of Chapter 11 bankruptcy filings by such companies in recent years.
Once you get the information, do not just put it in your credit file. Verify all information. Obtain a Dun & Bradstreet report to obtain a 2 profile on the company. If any of the information cannot be verified, or simply does not add up in your mind, ask for additional information or clarification.
In many instances, sales information is taken over the phone and an order is filled before credit references can be checked. Your company is then at risk and you may be unable to find the debtor if payment is not made. The credit application and follow up is, therefore, a necessity.
Bill Promptly and In An Understandable Format
Of course, the best method of payment is certified funds on delivery. However, this is often impractical and goods are sold on credit. If credit is extended, it is important to fix, as early as possible, the credit terms given (whether it be net 7 days, net 10 days, etc.), and provide your customer with written notice of the terms. You should then enforce your credit terms.
It is also important to bill promptly. Customers are most likely to pay soon after goods are received. Unbelievably, many companies wait several weeks, if not months, to deliver an invoice for a product sold or services rendered. Because of the lapse of time, your customer may delay payment while they investigate what product was purchased or service was rendered. They will have to match up their purchase order with your invoice. Prompt billing of your invoice may cut down the time needed for any such investigation.
The invoice should be clearly written. It should include an invoice number for your internal use for matching payment. It should also include the date goods were sold (or services provid ed), your customer's purchase order number (so that they may match up the purchase order with your invoice), the cost of each item of go ods sold, the date the product was delivered (or service was provided), the total amount charged, and terms for payment. It should also include the payment terms agreed to.
California law permits an interest rate to be charged for the delayed payments of goods or services. This is known as "time price differential" and generally exempts such transactions from California usury (excess interest) laws. Thus, if you wish to charge a service charge or interest on unpaid accounts, you should clearly set forth the rate conspicuously on your invoice. Your service ch arge should also be included on your open account/credit application (to advise your custom er that service charges will be incurred if timely payment is not made), as well as on any delivery receipt. That will assist you if it is necessary to take legal action to collect on your unpaid obligations, so you can recover interest.
Additionally, you should include a provision on recovery of attorneys' fees on your invoice, as well as your open account/credit application. This is an important provision, because California law in most circumstances does not provide for the recovery of attorneys' fees unless it is provided for by agreement or by statute. Generally, for the collection of a trade debt, attorneys' fees over $660.00 are not recoverable on the collection of a trade debt, unless provided for by agreement. We, therefore, recommend that an attorneys' fees clause be included, which should state words to the following effect:
"If it becomes necessary to take legal action to enforce this obligation , you shall pay us costs incurred in prosecuting any such claim including, but not limited to, reasonable attorneys' fees."
This provision should be clear and conspicuous.
If Payment is Not Timely Made, Take Prompt Action
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