Turning More of Your Accounts Receivable Into Cash

Turning More of Your Accounts Receivable Into Cash

Reprinted from Quorum Magazine

By Beau Brincefield

Do you ever have a problem collecting your bills? As attorneys who do a substantial amount of collection work, we have noticed that our business clients usually know very little about how to improve the “collectability” of their accounts. The following will provide you with a few simple forms and procedures that will make a dramatic improvement in your collections.

Three very simple, but important, things that you can do when you decide to extend credit to a client or customer are:

  1. Obtain some basic information about the debtor and his/her company.
  2. Obtain the debtor’s agreement to pay interest on any account not paid within 30 days.
  3. Obtain the debtor’s agreement to pay the costs of collection, such as court costs and attorney fees, if you have to take legal action to enforce collection of a delinquent account.

All three of these suggestions can be implemented easily in a simple, one-page form. If the form is drafted properly, it will not only satisfy all of the above objectives, but will also satisfy the requirements of a written contract. Creating a written contract between you and your client/customer will extend the statute of limitations on the debt from three years to five, which is another benefit.

  1. Getting basic information about the debtor. A properly drafted credit application / contract form need not be offensive or intrusive to a potential client or customer, yet it can provide a wealth of information which can dramatically improve your ability to locate debtors and collect delinquent accounts. Simply having a person’s name and address frequently is not enough because, by the time the account goes bad, the debtor has changed address or changed employment, or both. If you have other basic data, such as his/her date of birth and social security number, you can track him down wherever he/she goes.

    With the computer databases that are now available to investigators and law firms, it is almost impossible for a debtor to disappear if you have this basic information. Unfortunately, our collection clients frequently fail to obtain even this much basic information before they extend hundreds or even thousands of dollars of credit. Please note: unless you are fully paid in advance for your goods or services, you are extending credit. Even if it’s C.O.D., you are still extending credit until you get paid.

  2. Agreement to pay interest on delinquent accounts. Under the laws of most states, you cannot collect interest on a delinquent account unless the debtor has agreed to pay it. Although courts will almost always award post-judgment interest (i.e., interest after the judgment date,) and although you can always ask for pre-judgment interest (i.e. interest from the date of the original bill,) courts will frequently award post-judgment interest only. In other words, even if you get judgment for the full amount of your original bill, you will have given the delinquent client an interest free loan for a year or two or, maybe, even longer. Equally as bad, the judgment rate of interest that you are likely to get (even if you get interest both before and after judgment,) is typically a lot lower than the current commercial rate that would otherwise apply.
  3. Costs of collection. Perhaps the hardest blow to take is the actual cost of collecting delinquent accounts. Most of our first-time collection clients are shocked and disappointed to find out that they usually cannot collect all of what the debtor owes them, even when they get a judgment against him. The reason for this is that, absent an agreement by the debtor to pay attorneys’ fees and other collection costs, the court will not award them. (There are a few exceptions to this rule, such as where there are statutory provisions awarding legal fees to successful plaintiffs, but these provisions rarely, if ever, apply to collection matters.)

If you use a written credit application / contract form, you can easily avoid all of these problems. It is relatively easy and inexpensive to develop, and use a simple credit application/contract form can dramatically improve the “collectability’ of your delinquent accounts receivable.

Reprinted from Quorum magazine, a publication of the Washington Metropolitan Chapter of the Community Associations Institute, May 1999.