One Thing Better Than Collecting Overdue Receivables is Avoiding Them

Los Angeles Business Journal
Week of July 15-21, 1996

By Nick I. Iezza and Lisa E. Spiwak

Your small business is doing fine-except for one thing: too many overdue accounts receivable.

What can you do to collect the money-and avoid the problem in the future?

There are legal solutions-and others which involve modifying the way you do business.

Interestingly, the guidelines for coping with this problem are as applicable to small companies as they are to big ones. They include the following tips:

Get A Written Credit Application

Many businesses extend credit without a credit application from their customers. This is the most fundamental mistake in the credit process. The credit application serves two purposes. First: to help a company decide whether or not to extend credit to a particular customer, second: to provide the company extending credit with crucial information should the customer fail to pay.

Request Pertinent Information

The credit application must be thorough. Most small business owners that use credit applications fail to request the right information. Some of the most critical information should include: 1. Formal name of the customer and documentation thereof; 2. Verifiable credit references; 3. Names of the officers if it is a corporation; 4. Names of owners if it is a sole proprietorship or partnership; 5. Witnessed or notarized guaranties of at least one corporate officer of the customer if it is a corporation; and 6. A provision for the recover of attorney's fees, interest, and costs should legal action be required to enforce its terms. This last provision is critical if a customer fails to pay and the creditor is forced to seek the assistance of an attorney to protect its rights.

While most small business owners seem to understand the importance of the above, only a small percentage require written credit applications which attorneys would consider adequate. Most business owners feel that requiring a comprehensive application becomes "burdensome" to their customers and they fear that requiring such information might force their customers to do business elsewhere. We have also found that many small business owners have operated "on a handshake" for so long that they feel doing otherwise would be improper. This is an erroneous assumption.

A "handshake" will not go far in court when a company is trying to recover monies owned by its delinquent customers. Those customers who feel "burdened" or "insulted" when required to fill out a simple credit application will probably be the first customers to be sued for nonpayment of outstanding invoices. Legitimate companies understand that credit applications are required before entering into a credit arrangement. If your potential customer balks at this very important requirement you should reconsider whether you really need this type of customer.

Unless the customer is a major publicly traded corporation, we strongly recommend a credit application. Remember, an enforceable credit application is your first piece of evidence if litigation is necessary.

Do Not Let Customers Dictate Payment Terms

If your company's terms for credit payments are net 30 days and payment lags, telephone your customer on the 31st day or shortly thereafter to ascertain whether payment has been sent. You can diplomatically tell him that the purpose of the call is a "friendly reminder" that payment is due.

Do Not Extend Further Credit Until Overdue Payment is Received

Many companies make the mistake of shipping further product on the premise that the "payment was mailed." This is potentially a huge mistake since the company will be getting itself into a bigger hole if the payment is not received and the customer decides not to pay. Avoid further shipments until all past due balances are brought current.

Avoid "The Check Is In The Mail" Mistake

Falsely claiming "the check is in the mail" is the classic alibi of the ill-intentioned debtor. If your company does not receive a check within the promised time frame, a "red flag" should go up. Your company should consider this customer a "serious" risk.

Proceed With Immediate Legal Action

Once a small business owner has exhausted its best efforts to elicit payment, legal action should be immediately initiated to protect the company's position. The customer must be made aware that further delay in payment will not be tolerated. Also assume that if the customer is not paying your company's invoice, he is probably beginning to delay payment to other creditors as well. Thus your goal is to make sure your claim becomes this debtor's top concern so that he will pay your outstanding invoices before all others.

To insure this result, you should immediately initiate legal action. Even if a formal lawsuit is not filed, the real threat of legal action often "persuades" the recalcitrant debtor to pay your claim first.

For debts up to $5,000 a small business should file a small claims action on its own behalf. Small claims court is faster, far less expensive and will yield essentially the same result as if you had hired an attorney and filed in municipal court.

If more than $5,000 is involved, you should probably consult an attorney. Also, be advised that most law firms have a minimum suit requirements on cases they handle. (Our firm, for example, limits litigation on behalf of small businesses to those actions involving not less than $15,000).

After obtaining a judgment, several legal courses of action are available. Among them:

Bank Levy - One of the least expensive judgment execution vehicles is a bank levy, which costs but $25.

The name and address of the debtor's bank is given to the sheriff/marshal to serve the bank with the levy. Usually, within two weeks, the debtor's bank will take all of the money from the account and give it to the sheriff/marshal, who will turn the money over to the creditor to help satisfy its judgment.

The Keeper - If the debtor is a retail business, a uniformed deputy sheriff can be utilized to stand by the cash register and intercept all monies coming into the business. The keeper is also empowered to compile an inventory of the premises and hold that inventory for eventual sale, the proceeds of which go to the creditor. This strategy usually results in the debtor making a swift appeal for settlement. The keeper costs about $200 for an eight-hour assignment but this expense is recoverable.

There are also two other major remedies for business debt-the "third party" levy and the real estate levy.

Under a third party levy, which also costs only $25, the sheriff/marshal is instructed to serve an order on a third party who holds monies due the debtor. Rather than pay your debtor the third party must turn this money over to the sheriff, and the debtor cannot interfere with this process.

An example of how this levy works is a commission owed to a debtor such as a real estate agent.

If the debtor owns real property and has equity in it, a real estate levy could well allow the judgment creditor to take steps to foreclose on the property and to use the proceeds of the sale to satisfy its judgment

A real property levy is expensive and will usually take more than five months to accomplish; however, its effectiveness is without equal. Remember, the major guideline in collection bad debts is to act quickly after a judgment has been obtained.

Nick Iezza and Lisa Spiwak are partners of Spiwak & Iezza, an Encino-based commercial collection law firm which represents such clients as Wells Fargo Bank, City National Bank, AT&T Capital Corporation and Universal Studios.