In this two part series, we'll discuss customers and clients who don't pay your bills. Generally, they fall into two categories: those experiencing financial problems and those who believe there is a problem with goods they've received or with services rendered on their behalf.
In today's ultra-competitive business environment, companies that place too many demands on prospective clients can lose the sale. On the other hand, companies that are too lenient in extending credit or in pursuing delinquent accounts, can become easy targets for non-paying customers. And we all know, non-paying customers not only threaten a company's profitability, they threaten a company's continued existence as well.
Here are some suggestions that can help you screen prospects for potential non-payment problems. You can decide which ones you can use without risking customer alienation.
1. Require completion of a comprehensive credit application. Also, you could possibly require a nominal payment for processing (or as a deposit or retainer which you can credit against the first sale), or request that the customer submit a voided check.
WHY? You want to obtain asset information, particularly bank information. Having the information will help enforce a judgment at later date, if such action becomes necessary. Beware of the legality of charging a processing fee to an individual. You are more likely to justify this type of charge to a corporation.
2. Consider purchasing a credit report from a credit bureau or reseller. You can also check with trade groups. Many share information on troubled companies.
WHY? Self-reporting on the credit application is not an objective financial picture. Credit bureau reports are usually more comprehensive and objective.
3. If possible, obtain personal guarantees, particularly on new enterprises that have little or no credit history.
WHY? Enforcing a judgment on a business without assets (or one which has ceased to operate) is fruitless. Additionally, you may not be aware that the business could have Uniform Commercial Code (UCC) filings, mortgages or judgments that are still outstanding. These can put you far down the creditor list. While an individual can also be without assets, have liens, die or file for bankruptcy, it is still to your advantage to have the option of pursuing the individual. It's simply an additional source of payment. And, if the customer's company goes bad, it may be the only source.
4. Do not accept a Post Office box as the only customer address. Always get a street address as well.
WHY? Suit papers cannot be served on a P.O. Box. Even though the customer prefers to receive mail at the box (I even prefer to receive mail there), they obviously are conducting their business from a physical location, and you're entitled to know where it is. Otherwise, if the customer closes the P.O. Box, you may not be able to find them.
Remember, as much as you want to respect the customer's wishes in order to make the sale, you should consider the notion that if the customer refuses to submit to some or all of the above suggestions, it may be an indication that the customer knows that it cannot live up to your demand of timely payment. This is your chance to evaluate whether you feel that this customer will be an asset or a liability to you.
Next month: How to document in case the customer questions the quality.
Ron Z. Opher is a licensed attorney with a practice emphasis in contracts and collections. He can be reached at 1-800-RON-4LAW or by email: RZO@ron4law.com.