Getting paid for the goods and services you provide is vital to every business. For many business owners, collecting what is owed is the least pleasant part of their business. You entered the business world to sell a product or provide a service – not to chase receivables. Collection does not, however, have to be a dreadful burden. There are many steps that can be taken to minimize the hassle of collections and maximize cash flow.
Implementing a clear and consistent billing practice helps ensure high payment rates without any additional collection work on your part. Send bills on a regular basis, include a reasonable and conspicuous due date, and send reminder notices on a monthly basis if payment is not received when due. Most importantly, talk to your client at the beginning of the relationship about payment expectations. Conversations about payments do not have to be uncomfortable. After all, your customer does not think your services come free. These conversations are practical and give you a chance to showcase the easy methods you’ve established for making payments. To that end, every business should either already accept payments through their website or should begin the process of doing so.
Unfortunately, no matter how clear the expectations, how easily payments can be made, or the number of reminders and requests for payment sent, some clients are either unable or unwilling to pay. When this is the case, business owners have a few choices: (1) hire a collection agency, (2) retain an attorney to collect the debt; or (3) file a small claims action yourself if the amount owed is less than $7,500. With any option you pick, the chance of collection increases if you have detailed information about your customer. Therefore, if it is appropriate in your industry, have your customer fill out a credit application. It is best to obtain a personal guarantee of the obligation, especially if the customer is a newly-formed business entity.
Collection agencies generally charge a contingency fee for collecting the debt. While some attorneys may also charge a contingency fee for debt collection work, many do not. Thus, for smaller debts it may not make sense to have an attorney work on an hourly basis to collect the debt. On the other hand, for larger debts with a reasonable chance of recovery, you may not want to pay 20-30% of the recovery to a collection agency when the hourly billings from an attorney would cost far less.
Collection agencies and attorneys who regularly engage in consumer debt collection are subject to the Fair Debt Collection Practices Act (FDCPA), which was enacted to eliminate abusive debt collection practices against consumers (i.e., debts for personal, family, or household purposes). Debt collectors found in violation of the FDCPA are liable for statutory or actual damages incurred by the consumer. Courts have become increasingly willing to hold the business which hired the debt collector vicariously liable for the collection agency’s violation of the FDCPA. If you hire a collection agency, it is important to choose one that is both aggressive and reputable and not just the least expensive.
An attorney can pursue collection in the same manner as collection agencies, but with the added benefit of obtaining a judgment on the amount owed through the court. If your customer does not pay or settle before the case proceeds to a judgment, the properly recorded judgment will act as a lien on any real property the customer owns. You can also execute on any non-exempt property in the customer’s possession or in the possession of third parties. Importantly, other than in small claims court, business entities may not represent themselves in court and must have an attorney.
A business should be paid every dollar it is owed, but there are traps for the unwary. Avoid these traps by creating a clear and consistent billing practice and retain the appropriate professionals if bills and reminders do not work. With these steps, you should be able to spend more time making money and less time chasing it.
ABOUT THE AUTHORS
David J. Malley is a Partner at Jolley Urga Woodbury & Little. He has experience in the areas of creditor’s rights, commercial litigation, landlord-tenant, and non-compete agreements. Brian C. Wedl is an Associate at Jolley Urga Woodbury & Little. He has experience in the areas of commercial litigation, landlord-tenant, banking litigation, and probate and trust litigation.
David J. Malley, partner and Brian C. Wedl, associate, Jolley Urga Woodbury & Little