In a recent column, I described ways to prioritize your debts
and deal with your creditors when there isn't enough cash to go
around. My advice generated a pile of mail, most of it objecting to
my suggestion that some bills just won't get paid if things are
tough. This column is for those on the other end of the
stick--small businesses that are owed money and are having trouble
getting paid.
When you run your own business, it is inevitable that, sooner or
later, someone will start making payments slowly, or not at all.
Sadly, there are some people out there who will flagrantly breach
their contracts if they think they can get away with it. Even nice,
ethical business owners can get themselves into situations where
there just isn't enough cash on hand to make everybody
happy.
The best time to avoid bad customers is right upfront, before
you start doing business with them. Your customer agreement should
state clearly and precisely:
- When payment is due
- How payment is to be made (for example, by check or wire
transfer to your bank account)
- What will happen if payment is not made in timely fashion (for
example, you have the right to cease working, you have the right to
repossess what you've sold them
- That interest at a penalty rate (3 or more percent over a
bank's prime rate) will accrue and be charged on any overdue
payment.
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It is amazing how many contracts are silent or vague on these
essential points.
So now, despite your best efforts, it has happened: one of your
customers has started paying slowly, or has stopped payments
altogether, or is claiming that he is waiting to get payment from
someone else and then he will pay you promptly. What do you do
now?
Whether or not you are willing to negotiate with the debtor, you
are not likely to get anywhere unless you first get the
debtor's attention by demonstrating that he ignores his
obligation to you at his peril. If you still are providing goods to
a financially troubled customer on a regular basis, or if you are
in the middle of a big project for a troubled client, the first
thing you should do is stop. Big debts almost always start out as
little debts, which become bigger and bigger as a business
frantically keeps working for the customer in the vain hope that
the situation will turn around. In the meantime, the business
ignores other customers who are ready, willing and able to pay
their bills on time.
If you have no leverage over your delinquent customer, you must
become one of the "squeaky wheels" that gets their
attention. Most debtors will find a way to pay off a creditor they
fear, or who makes a bloody nuisance of themselves, especially if
the debt amount is small.
You should not hesitate to call your debtor frequently and
persistently until they respond. The federal Fair Debt Collection
Practices Act and related state laws provide some guidance on what
you can and cannot say in a collection call. A lot of these
guidelines, however, apply only to collection agencies and consumer
debts and do not prevent a small business from aggressively
pursuing its own debt, especially if the debtor is another
business.
You may threaten to file a disparaging report against the debtor
with the major credit bureaus, as long as any such report is 100
percent true and accurate. If it isn't, your debtor may be able
to sue you for libel, slander or violation of fair credit reporting
laws.
Have your attorney send a "demand letter" stating your
intent to sue the debtor if something isn't worked out to your
satisfaction by a certain date. If the debtor is located in a
faraway state, hire an attorney in that state to send the letter so
the debtor knows you are willing to pursue him on his own home
turf. Better yet, have your attorney send a draft summons and
complaint (an actual court document) with the letter, and a demand
for response in seven to 10 days in order to avoid litigation.
Finally, be prepared to sue, even if it's in small claims
court. Of course, there is no guarantee you will win, but troubled
debtors can usually tell if you are bluffing when you threaten to
sue, and it's amazing how quickly their attitude adjusts when
court papers are actually served. Make sure they know you are
willing to make everyone's lives (including your own) miserable
until you receive satisfaction.
In avoiding bad debts and problem customers, it's always
best to remember the advice my immigrant grandmother once offered
to me: "When you are dealing with people you do not know well,
assume the worst; that way, any surprises you have will be pleasant
ones."
Cliff Ennico is host of the PBS television series MoneyHunt
and a leading expert on managing growing companies. His advice for
small businesses regularly appears on the "Protecting Your
Business" channel on the Small Business Television Network at
www.sbtv.com.
E-mail him at cennico@legalcareer.com.