Businesses large and small regularly face the challenge of collecting from customers for the sale of products or services. Failing to aggressively pursue accounts receivable can create an expectation among some customers that the obligation owed to your business need not be a priority. Incorporating some or all of the following strategies will reduce your company’s collection problems and help minimize cash flow concerns that can develop from the failure of customers to promptly pay their bills.
Adopt a Written Contract or Purchase Order
Where appropriate for the business and transaction type, a written contract or purchase order that documents the terms of sale provides a foundation for collecting money owed to your business. While not appropriate or cost effective for some transactions, a written agreement should be the rule for high value transactions. A written agreement should include clear terms regarding the product or service provided, the sale price, payment terms, interest, and the consequences of failing to make prompt payment. Written agreements are highly effective in minimizing misunderstandings as to payment expectations.
Add an Attorney’s Fees and Collection Costs Provision
Including a provision that requires a customer to pay reasonable attorney’s fees and collection costs in the event of default provides a strong impetus for a customer to make a payment. Most businesses have no interest in engaging attorneys to contest collection demands when the company’s obligation to another party is clear. An attorney’s fees or collection cost provision should be a part of every written contract and purchase order used by your business.
Require a Personal Guaranty
While not appropriate for many transactions, a personal guaranty can increase the chance of collection if utilized. While not an ironclad guarantee of payment, the personal guaranty means that an individual, and not only the business purchasing the goods or services, is personally liable for paying the obligation. This can be especially helpful if the corporate party has poor credit, is late in paying your invoices, or lacks the assets necessary to satisfy a judgment. Individuals who guaranty corporate financial obligations are much more likely to ensure that business obligations are paid. While there is always the threat of personal bankruptcy, that option is neither simple nor inexpensive.
Take a Security Interest
In certain circumstances, taking a security interest in collateral may be appropriate for major transactions. Security may take the form of goods, accounts, intellectual property, real property or anything else of value. Taking property as security may be tricky and often requires “perfection” to ensure that the secured creditor’s interests are recognized and take priority over other creditors. In the case of personal property, this typically means filing a Uniform Commercial Code (“UCC”) Financing Statement with the Minnesota Secretary of State. For real estate, perfection occurs by filing of a mortgage. Any business seeking to take security for an obligation is wise to consult an attorney so as to ensure that the collateral serves as true security for the payment.
Institute Systems for Monitoring and Reviewing Collections
Above all, a business should institute systems and processes for monitoring and reviewing accounts receivable and collection activity. These systems and staff time can pay for themselves. Businesses realize trouble when failing to monitor accounts receivable and providing indefinite extensions with the idealistic hope of someday being paid. Failing to institute monitoring of accounts receivable may mean a business loses certain rights, such as mechanic’s lien rights, which are limited in duration and must be carefully complied with to ensure the lien is enforceable.
Conclusion
Consistently collecting receivables can make the difference between a company’s success or failure. Instituting some or all of the above strategies can help reduce the risk of uncollectible receivables in your business. The ideal time to develop processes and contracts to address collection issues is before they develop. Contact any of the Trepanier MacGillis Battina P.A. business law attorneys for help reviewing your standardized contracts, purchase agreements, and collection procedures to maximize your collections while avoiding legal pitfalls. As appropriate, our attorneys can also draft personal guarantees and security agreements for major transactions.
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About the Author:
Minnesota business attorney James C. MacGillis practices in the areas of contracts, business law, and commercial litigation. For more information about developing collection strategies and pursuing collection activity when appropriate, please contact Jim at 612.455.0503 or jmacgillis@trepanierlaw.com. Trepanier MacGillis Battina P.A. is a Minnesota corporate law firm located in Minneapolis, Minnesota.