- Features | May 23, 2013
Simple Tips to Help Prevent Loss from Overdue and Delinquent Accounts
There is a new economic reality emerging, bankruptcies are at an all time high and there are an unprecedented number of uncollected default judgments. Now more than ever it is important to have an understanding of who you are doing business with and how to limit your company's exposure to loss. There are some simple things that you can do to protect your company from being overburdened with overdue and delinquent accounts.
First, it is important to have a clear cut credit policy. If you extend terms there should be a firm understanding from your clients of what their responsibilities are and what the potential consequences might be if they break those terms. A good way to communicate those policies is to require your potential client to fill out a credit application. Part of the credit application is the outline of conditions; these are what your client can expect from you and what you expect from your client. In the terms and conditions you clearly outline your credit policy and any remedies in place for when accounts go delinquent.
I advise my clients to include the language that if the accounts go overdue, then they will add reasonable collections and/or legal cost incurred to collect the debt. This is vital language because it allows your recovery agent to legally ask for the additional fees from the debtor and therefore reduces the overall cost to you if recovered. Historically we know that contractors can exercise their lien rights on a job or property; this can be an effective way to motivate debtors but can be lengthy and most times you come out of pocket to file. I endorse a more proactive approach that combines contingency based collections coupled with lien rights when necessary.
Debt recovery companies, such as Paladin Commercial Group, frequently supplies contractors with credit applications so they can gauge the credit worth of a potential client. Part of that credit application is a personal guarantee. Having worked in the construction industry as long as I have, I know that some contractors are not comfortable with requiring their clients to sign a personal guarantee. This is why we recommend that it is part of the credit application, but not a requirement to do business with your company. We suggest that our clients put very little energy towards the personal guarantee. When they receive the credit application back, if the personal guarantee is signed then you can conclude that your client is confident enough to put up his personal wealth against the credit you are extending his company.
If it is not filled out, then you can take that as a sign to keep a close eye on how much and how far you let that client go on credit. If a client does go over terms, it is recommended that you take some time to communicate when payment will be forth-coming; an outlined credit policy will guide you in the actions that need to be taken when accounts go overdue. Depending on how often you review your ageing, the length of time will determine what steps to take and how to escalate your internal collection efforts. When an account is thirty days overdue you would want to remind your client that payment is overdue, typically with a letter and an invoice mailed out to them. If the account goes out further, then your efforts need to be a bit more assertive, such as a phone call to the accounts payable department. Finally you will have to draw a line in the sand (figuratively speaking) when you will discontinue working with the account on terms in the form of credit hold till the account is resolved. Most companies look at the 120-day mark to put an account on credit hold. After a credit hold and perhaps a demand letter, you must make a decision on what to do with that account. It is at this time that we recommend placing the account for collections with a licensed and bonded collection firm. The hope of having a clear cut credit policy is that it will deter a client from going overdue. If they do, you must follow the steps you deem appropriat