Streamlining the Collections Process for Your Small Business

 

By: Jason L. Van Dyke, Esq.

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In over eleven years of practicing law, I have heard a number of different sayings from small business owners when it comes to collections. My favorite, by far, is that you can’t spell “client” without a “lie.” Although I cannot take credit for this particular quip, I would happily plead nolo contendere if it was attributed to me – the small to medium sized business owners I represent certainly hear a plethora of lies from clients who owe them money. When I take on a new client with collection problems, the most common denominator among them is that they have nothing resembling a streamlined process for dealing with clients who slow-pay or short-pay them. Nobody likes making that telephone call asking for money, but it’s an important part of running a business. Entrepreneurs do what they do for a living, not for charity.

The first step in having an efficient collection system for your small business is to have a workable and easy-to-understand accounting system. This does not necessarily mean that you need QuickBooks or some other form of expensive accounting software, but it does mean that you need some method of keeping track of your receipts (actual money that comes in the door), expenses (money that goes out the door), receivables (people who owe you money), and payables (people to whom you owe money). For years, my system of tracking receivables was a large whiteboard near my desk that was known as “the deadbeat board” – which simply contained the name of a person that owed me money and that amount owed. If a person were current on his payment agreement or otherwise staying in touch with me, his information would be written in green. A person who was late – but starting to get on my nerves – would have their information written in blue. A person that had stopped making any attempts to pay me (and who was actively being sued) had his name written in red. When I got a judgment, the name of the person I had a judgment against was written in black along with the amount of the judgment. Since most of my clients paid up front, this was a very simple tool that I could use to effectively get a “snapshot” of my receivables. Other businesses may need a spreadsheet for this purpose. Larger businesses, or those with a large number of accounts, may need specialized accounting software or even an outside accounting firm. [1]

The second step for having an efficient collection system is written policies, with deadlines and consequences, concerning how receivables are collected. I grew weary of chasing folks around for money, so I solved the problem permanently by requiring payment in full up front. While this approach is effective, it does require me to refer some of my business to more patient lawyers. It’s also not a practical approach for businesses that customarily operate on credit or payment terms. I advise many clients to: (a) invoice for goods furnished or services rendered immediately; (b) send a reminder letter when the invoice is 30 days past due; (c) send out a more strongly worded letter at 60 days; and (d) get an attorney involved when the account is 90 days past due. Of course, every solution needs to be tailor-made to fit a specific business. The construction industry, for example, needs attorney involvement far sooner than most so as to ensure that the mechanic and material man’s liens are filed in a timely manner and with appropriate notice. The same is typically true of other businesses with statutory lien rights under state law. [2] While no system is perfect, and no system works for every business, it’s of the utmost importance to have a system in place.

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The third and final step in the process is to have compliance procedures in place for when things really go south (typically when an account is 90 days or more past due). First and foremost, all collection notices and letters must be in compliance with state law.  Federal laws, and most state laws, distinguish between commercial debts and consumer debts. [3] Some do not. While Federal law distinguishes between a “creditor” and a “debt collector,” most state laws (including Texas) make little or no distinction. Improper or inappropriate debt collection practices can quickly land a company in legal hot water. [4] While many companies turn to third party debt collection agencies, these can actually put the company in an even bigger mess. In most cases, even for a relatively small collection matter, a company will save money (and headache) utilizing an attorney over a collection agency. [5]

Although many believe that debt collection is easy for small business owners, the truth is that it can be a very complex legal process. Debt collection is a particularly tough business in states like Texas where wage garnishment is not available as a collection tool. The laws concerning appropriate debt collection practices – for business owners and collection agencies alike – change every year. However, even in states known for their friendly business environment, the changes in law almost always benefit debtors at the expense of their creditors. [6] For this reason, it’s important for every entrepreneur to have a written receivables collection process in place and a skilled attorney they can call when a client refuses to pay. Glorify the entrepreneur. Uhuru!

[1]       Expect to pay your attorney handsomely for streamlining your in-house debt collection process. It is money well spent that will avoid write-offs and more expensive problems later.

[2]       While a mechanic’s and material man’s liens are the most popular recourses, many would be shocked by the varying types of statutory liens available under most state laws. While the procedures offered by these liens can be very useful in collecting your receivables, the consequences for failing to strictly comply with time requirements and procedures are often dire. The use of these liens – especially mechanic’s and material man’s liens – is work that should be left to your attorney.

[3]       A consumer debt is typically defined as “any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment.”

[4]       A debt buyer, such as Midland Funding and Portfolio Recovery, steps into the shoes of a “creditor” rather than a “debt collector” under Federal law. This loophole typically makes remedies available under the Fair Debt Collection Practices Act that are unavailable to a customer. However, the creditor must still comply with state laws regulating collection practices by persons other than third party debt collectors.

[5]       Attorneys are subject to much greater regulation than debt collection agencies.        Furthermore, skilled con men have been known to create “fly by night” debt collection agencies to steal from clients.

[6]       According to Supreme Court Associate Justice Joseph Story, written in 1841, this was actually the point of including bankruptcy power in the Federal Constitution.

 

 Author: J.L. Van Dyke, Esq.

Author: J.L. Van Dyke, Esq.

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