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University of Massachusetts Amherst

Family Business Center

How to Collect from Delinquent Customers

by Shel Horowitz

Few things are as hard on a business as poor cash flow because your customers are late to pay. Fortunately, Mark Cress, of FBC sponsor Bulkley, Richardson and Gelinas, outlined some strategies to keep your receivables from swallowing your company.

First off, make a problem much less likely to begin with. Before extending credit, order credit reports, including Dunn & Bradstreet. Examine financial statements and tax returns. Establish a credit limit and stick to it. Next, monitor changes in a customer's pay pattern; this could be a warning sign.

Send "prompt, friendly reminders; do not underestimate the value of letting your customer know that you know they owe you money. Don't let them feel it's not important." If you neglect it, the cusotmer will feel you don't care, and collecting will be much harder.

And if the problem persists, cut off the flow of goods or services."It stops the bleeding and brings the issue to a head, especially if they need your product or service." Of course, f you owe this company money, you're in a position of strength; you can offset the money you owe against what the company owes you.

Cress is not a big fan of working out payment plans; he prefers to get the debtor company to settle the debt. If you do work out a catch-up plan, "I'd recommend a very significant initial payment" - and staying on top of payment schedule. Keep good documentation, including records that show your product or service was properly delivered. If legal action is necessary, it's "helpful to document that there was never any question about product/service quality, filling the spec." And if the company ignores your communications or welshes on a deal, "race to the courthouse before other creditors, for pre-judgment remedies." Once bankruptcy is filed, a separate lawsuit will do little, if any, good.

Still,even if you get redress in court, if the company later goes bankrupt you may face what's called "bankruptcy preferences: You not only don't get paid what you're owed, but you get sued by the trustee to recoup money you were paid just before the bankruptcy. Take the money anyway, 90% of preference actions are settled (usually for a lot less) and there are defenses to preferences."

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