Getting Paid What You’re Owed

Are your clients using vendor capital to finance their expenses or
businesses? Vendor capital’s only similarity to venture capital is that it
comes from outside. When a customer puts off paying your account for 120
days, you are making a four-month interest-free loan you can ill afford.
Even worse, it becomes an outright grant if you, the vendor, aren’t able to
collect at all.
When customers are squeezing extra weeks and months out of their
payables, developing an efficient and effective debt collection system is
of utmost importance. This is particularly true during economically slow
times when even the steadiest and most reliable customers may be
experiencing cash flow problems.
“But wait a minute,” you say. “When cash starts flowing again, I
don’t want to find myself without any customers.” That’s a fairly common
sentiment. Fear of offending those who were once consistent buyers holds
back many collection efforts. Entrepreneurs inadvertently become vendor
lenders when they are reluctant to press for payment out of concern that
their clients will find more amenable suppliers.
To solve this dilemma, you need a thoughtfully developed and executed
approach to the three phases of debt collection.

Phase # 1: Prevent collectibles from becoming overdue.

* Review your customer accounts each month to quickly identify those that
are occasionally, or even chronically, late.
* When you notice that an account is overdue, make sure the company was
billed, the goods went out, and no problems arose when the order arrived.
* Send out invoices the day shipment is made or the services are completed.
Many businesses unwittingly create their own cash flow problems by not
mailing invoices for a week or two.
* Mail invoices to specific individuals rather than to companies.
Poorly-targeted bills can get caught in a mailroom shuffle for days before
reaching the right desk.
* Track receivables from the first day invoices go out. Businesses with a
large number of clients should be using automated software for their
invoices and accounts tracking. If you have only a few clients, track them
on an “aging” or control sheet.
* Shorten the preliminary credit period from 30 days to 15 days or less.
While a 30-day term may be common, it’s certainly not mandated. Find out
if any of your competitors have reduced their terms to 15 days or C.O.D.,
or if your prices, delivery dates or some other aspect of your service
would make shorter terms acceptable to your customers.
* Most customers assume they have 30 days before they need to cut a check,
which means as many as 45 days may elapse by the time you receive it. You
must tell customers if payment is due earlier. Be sure to also consider
the persuasive power of discounts and — using the reverse strategy —
interest charges.
* When work is to be customized, ask for a deposit and explain that the
balance is C.O.D., or set up terms with half due upon delivery and half 30
days later.
* Avoid falling into the trap of feeling that your customers are friends
who can expect unlimited credit. Even if you socialize after hours, in the
business relationship your obligation is to provide a quality service or
product, and their obligation is to be sure to pay you on time.
* Forty-five days after the invoice date, call and find out why the
account hasn’t been paid. Use a “customer service” approach: “As your
check hasn’t arrived, I wanted to make sure nothing was wrong with the
order.” This accomplishes several things. You’ll find out if orders
weren’t correct, remind customers that accounts are overdue, and let them
know you watch receivables very closely.
* Make a “customer service” call to chronically late clients the day their
orders go out. “I wanted to let you know your goods have just been
shipped. Could we speed up payment by sending the invoice to a particular
person?” This prompts faster payment because it ties payment to customer
satisfaction at having the order filled promptly.

Phase # 2: Collect overdue accounts before they are seriously late.

* Phone calls have proven significantly more effective than letters,
particularly if you make a point of calling customers about outstanding
invoices within a day or two of their becoming overdue.
* Make phone calls or send out reminders twice a month, rather than every
30 days. Although it costs more, you definitely get a lot more back.
* Blame your CPA, your business manager, or even your mother-in-law, but
stop giving credit to debtors who are overdue. Say, for example: “I hate
doing this, but our president insists that once accounts are overdue by 90
days, all orders have to be C.O.D. As soon as you pay off some of this
overdue amount I can give you credit again, but until then my hands are
completely tied.”
* As accounts age, increase the frequency and urgency of your calls and
letters. Press, in the nicest possible way, for payment without any
further delay. Most businesses wait twice as long as they should for
payment. You should know whether or not you are going to get paid within
nine to 12 weeks. Waiting any longer is asking for trouble economically.
* If you cannot persuade a customer to pay, give the account to somebody
who can. Collection agency personnel have heard every possible excuse and
have appropriate responses ready. They are trained to look for assets that
may not be obvious, so they can sometimes obtain payment from debtors you
believed were unable to pay. Collection agencies are most successful when
the account has been overdue weeks rather than months, and the debtor has
been treated with courtesy.

Phase # 3: Collect delinquent accounts or cut your losses.

* When it’s clear that the customer won’t pay without a significant change
in circumstances, you must decide if the account is worth any more of your
time and resources. It’s not uncommon for business owners to get so angry
at not being paid that they become determined not to let the debtor off the
hook. Don’t let your emotions block an objective assessment of whether
it’s worthwhile to continue your collection efforts.
* The simplest way to apply legal pressure on a debtor is to file in Small
Claims Court (SCC). The amount you can sue for in SCC varies depending on
where you live. It may be as little as $1,000 (Kansas) or as high as
$15,000 (some Tennessee counties); California at $2,000 is average.
Attorney Ralph Warner, author of Everybody’s Guide to Small Claims Court,
points out that “In recent years the maximum amount for which you can sue
has been on the rise almost everywhere. Don’t rely on your memory or what
a friend tells you; call the local SCC clerk.”
* Most states bar attorneys from SCC actions (except when they are the
creditors), but most also provide advice on filling out the forms, serving
notice to the person you are suing, and preparing your case.
* The most important thing you can do to ensure the success of your SCC
action is to document every piece of communication you had with the debtor,
from the initial order to each of the delaying tactics employed. If you
have written confirmation of the customer’s acknowledgment of the debt, so
much the better.
* If your documentation is good, and the defendant has admitted to owing
the amount, you can probably send an employee to the SCC hearing to
represent you. However, the designee should have knowledge about all
aspects of the case that might be argued. If your case is weak, you as the
business owner should be the one to attend.
* “Court costs can be added to the judgment amount,” explains Warner. “But
you must be sure the judge realizes you have incurred them.” Usually you
can recover out-of-pocket expenses that are part of the SCC process, such
as filing fees, but you will not receive compensation for such things as
time taken off work or photocopying expenses.
* Winning your case is not the same as getting paid. “Much to many
people’s surprise, the court does not enforce its judgements and collect
money for you,” warns Warner. Start with a polite note requesting payment
and if that doesn’t work, talk with your SCC clerk about the options
available in your state. Or consult one of the books listed in the
Resource Directory to learn about the many options available once you have
been handed a favorable judgement.
* If, instead of suing, you decide to stop further efforts to collect the
amount owed, keep the door open with a last call to say: “Pat, I realize
things are tough and you are fighting to save your business. I want you to
know I’m not going to pursue this bill any longer. If and when you can pay
it, I trust you to send me a check, but until then we’ll forget it ever
existed. Meanwhile I’ll continue to supply you on a cash-only basis.”


“Asking for money strikes fear in the hearts of most small business owners,
but it doesn’t have to be an obstruction to the relationship or detract
from a potential sale.” So counsels Bonnie Barnett, owner of a 30-person,
Los Angeles collection agency for six years who is now helping Community
Memorial Hospital in Ventura convert to a computer-based collection system.
“Business owners, or employees who are involved in selling, should discuss
terms of payment early in the transaction. That way customers know what’s
expected before making a purchase decision. It’s also important to send a
statement immediately upon delivery of products or services, rather than
waiting 30 days,” Barnett emphasizes. “If payment is not forthcoming, a
consistent mailing or calling process should be undertaken to remind the
customer. Owners should not be afraid to use a collection agency as a last
resort. However, be sure to investigate an agency before signing up,
because the manner in which customers are treated by the agency reflects
strongly on the reputation of the business trying to collect on the


Attorney Warren Greher of Neuman, Tamsen & Greher in Newburgh, New York,
believes in being prudent from the very beginning when establishing a
credit account. A specialist in bankruptcy and debt collection, he
counsels small business owners to “obtain a customer’s social security
number, place of employment, and bank account information D should it
subsequently prove necessary to seize the latter to satisfy a debt.” If
money owed is not forthcoming within 30 days, Greher advises “getting on
the phone with the customer, maintaining a record of all conversations, and
continuing to call until you get a response.” Greher interprets a
customer’s failure to return calls as a “number one warning sign,” and
suggests turning the account over to an attorney or collection agency if
receivables go beyond 90 days. He has found that customers “are more
likely to take notice” when an attorney is involved, although he does not
use a threatening approach. “I try to be friendly but firm,” Greher says,
“and emphasize that my goal is to resolve the claim for the creditor.”


When people or companies are stretching their credit to the limit, it can
be difficult to judge which have the savvy to pull through and become
excellent customers again, and which will go under leaving many unhappy
creditors behind. Since your business is at risk if you don’t go after
money you are owed, you need an approach that will effectively reduce your
debtor load while conveying your sincere concern for your customers’
well-being and your willingness to serve them.
Leonard Sklar, author of The Check Is Not in the Mail and CEO of Sklar
Resource Group, Inc. in San Mateo, California, has built a coast-to-coast
company supplying temporary workers trained in credit collection and
customer relations. His premise is that how you deliver a message is as
important as what you say when dealing with particularly sensitive issues
such as overdue accounts.
Sklar relies on good communication to soften the blow of frequent
calls that steadily increase the urgency of their “you must pay” message.
The following scenarios demonstrate his approach to effectively dealing
with recalcitrant accounts.
If you are afraid of alienating somebody who has been a good customer,
blame a third party such as your CPA.
“I would really feel terrible if anything I said offended you, because
you’ve been a good customer. I know times are tough right now, but I have
to say that I want you to pay what you owe us. My business manager
requires that we don’t let accounts go over 40 days (even for a good friend
or family member).” Sklar finds that these statements even work with
people who say exactly the same things to their own customers.

Get a commitment.

Your best clients, who are as hassled by late payments as you are, usually
try to put you off until their cash flow increases, or a specific check
arrives. The best approach is to acknowledge the situation and deal with
the feelings, then help your customer come up with a solution.
“Charlie, I understand what you are saying. Many of our customers are
feeling pressured right now. They have a lot of bills to pay, and it’s a
stressful time. But I’m going to have to ask you to put off some of your
other creditors, because if we are going to continue to do business,
particularly when the economy is slow, we have to get paid.
“What we need, Charlie, is at least 50 percent today, and another
check for the balance that’s good two weeks from now. Of course I’ll call
you three days prior to the date on the post-dated check to make sure it
can be cashed.”
A post-dated check is one of the most effective ways of getting people
to commit to payment, and they are good 98 percent of the time. Remember,
however, that you are legally required to ask if such a check is good
before depositing it.

Don’t settle for a vague promise.

A less-than-good customer is more likely to put you off with a vague
promise or try to stall for time. Be ready with a response.
“The end of the month isn’t going to work. Frankly, we need to have
the check sent today.”
Any company, large or small, can cut a manual check. You don’t have
to be a victim of the payment schedule, if the customer tries to use this
to put off sending the money owed.

Nail down the promise.

If somebody says, “Yes, I’ll send you a check,” Sklar assumes it will be
sent that same day and responds with: “Great, today is the 10th so we
should get your check on the 13th. I’ll mark that on my calendar, so I’ll
be sure not to miss it.”
Keep the conversation friendly, let the customers know you’ll be
looking for the check, and give them the benefit of the doubt — once.

Nail down the second promise.

If the money doesn’t arrive on the 13th as promised, don’t wait until the
14th or 15th to take action. Immediately call and say: “Customer, we
didn’t get the check you said would be sent on the 10th.” Most people will
give you some excuse, which Sklar advises you accept because one broken
promise is understandable; anyone can overlook something.
If the customer makes you another promise, nail that down as you did
the first time: “O.K., please do send the money. It’s important we have
the check this week. It should arrive by the 16th so I’ll mark my calendar
again. Do address the envelope to my attention so I’ll see the check as
soon as it comes in. Thanks.”

Deal directly with the stall.

If the check hasn’t arrived by the new date, take an even firmer but still
approach, keeping in mind that two broken promises in six days is not a
coincidence. “Hi, the check you said you were going to send us a second
time didn’t arrive either…Well, if you write the check today, we should
have it by the 19th. If we don’t have it by then, I’m sorry to say, my
hands are tied. We’re required to turn it over to collection immediately
on the 20th. I’d hate doing that to such a good customer, but I’ll have no
Sklar points out that this stance gives the customer a very clear
choice — with a warning not a threat — to pay or something unpleasant
will happen. He adds: “Stay friendly, say you much prefer to work things
out with your customers, especially good customers, but don’t give them any
more time. Remember, in this instance these are not good customers; they
are debtors who are taking advantage of the niceness of other people.”

It’s in your attitude.

Sklar concludes by saying: “People always have some money, so debt
collection is negotiation. I’m not suggesting that businesses be
hard-nosed or insensitive, but they should recognize that a game is being
played. Don’t let the accounts sit there; get on the phone today. Even
good customers sometimes need to be prodded. While you won’t be as pushy
with these customers, if you ignore their delinquency the likelihood of
your getting paid diminishes. When customers are deciding where to spend
their limited dollars, and they know you are watching the account, the
squeaky wheel does get the grease.”


Credit management for most small business owners means allowing customers
to purchase goods on an open account in expectation of significantly
increased sales. Unfortunately, some entrepreneurs don’t realize that good
credit management should go much further.
The first step in preventing bills from becoming overdue is to have a
written policy detailing how accounts are going to be paid, made available
to all customers prior to doing business. This policy should describe how
credit will be managed; how and when you will be paid for your product or
service; and what the consequences of non-payment will be. Also cover the
interest that will be charged, and the point at which the unpaid bill will
be turned over to collection or taken to Small Claims Court. It’s most
important that you include the consequences for not following the policy.

The following 20 points will help you to set up a sound credit policy.

1. Before setting your credit policy, find out what your competition is
doing and what your customers expect. Get this “street” information from
your sales staff; they know their customers’ credit concerns and are most
likely to know what the competition is offering.
2. Have a public credit policy that your customers receive, and a private
credit policy to guide your staff’s implementation. The private policy
will cover such things as when credit limits can be increased, and the
details of your credit collection process.
3. A uniform and consistent credit policy treats all your customers
equally, but not necessarily the same. For instance, everyone whose
account becomes overdue will be contacted to find out what went wrong,
and will be helped to find an individualized solution to the problem.
4. Educate your staff about the details and importance of your credit
policy. The more committed your employees are, the better they will make
it work. Everyone should understand that ultimately their incomes depend
on satisfied customers who abide by the credit terms you have established.
5. Set credit limits to minimize your exposure to loss. New accounts
should be given the minimum amount of credit that’s practical in your
business. Be cautious in extending credit to people or companies whose
credit records indicate past payment problems or irregularities.
6. Regularly review your customers’ payment records, and increase credit
limits as appropriate so that you and your clients mutually benefit from
building long-term relationships.
7. The “standard” credit application forms sold by stationery stores are
usually inadequate. Many have no place for the applicant’s signature and
few cover such things as recovery of interest, court costs and attorney’s
fees that protect you, the creditor.
8. You need a detailed credit application customized to your business and
reviewed by your attorney. Your trade association may have a particular
credit application it recommends. Print your credit conditions and terms
on the back and be sure the applicant signs it.
9. Clearly convey when you expect to be paid. Goods should be shipped and
invoices mailed within 24 hours of the invoice date. In addition, invoices
should clearly state when payment is due, whether an early-payment discount
may be taken, and what finance charges (if any) will be imposed for late
10. Customers who are short of cash tend to pay bills that carry finance
charges first. Even if you never enforce the finance charges, seeing that
there will be a consequence for not paying on time reduces slowness. The
most typical finance charge is 1.5 percent per month after 30 days, which
equals 18 percent a year.
11. Customers, especially those short of cash, are always motivated by
saving money. Offering a discount for prompt payment, or for cash in
advance, will be offset by what you save in collection costs.
12. If you do business with customers outside your county or state, your
credit application/agreement should require that any litigation be filed in
your city. This helps limit your legal expenses.
13. Commercial credit applications should request legal identity
(partnership, corporation or sole proprietorship) and number of years in
business. If you require owners, or key officers of a corporation, to
guarantee payment of the account, be sure to obtain their names and home
addresses as well.
14. Consumer credit applications should include the name, address and
phone number of the applicant’s employer, length of employment, length of
current residency, and whether the applicant rents or owns.
15. Ask for at least three trade or personal references, with contact
names, phone numbers and addresses, as well as the names and phone numbers
of banks, and specific account numbers. If the applicant is a tenant,
include the name, address and phone number of the landlord.
16. Twenty minutes spent evaluating a customer’s creditworthiness could
save you hours, and dollars, in trying to collect bad debts. Call all the
references provided and verify the information given. Checking with credit
reporting services such as TRW is also advisable.
17. Check each applicant’s name, address, phone number and bank account
information against a record of debtors you have dropped or refused credit
to in the past. The worst credit risks won’t hesitate to disguise their
identity with a different name or address, but there’s often some matching
information that suggests they should be checked further.
18. Give each account a copy of the credit application — now a credit
agreement — showing the approved credit limit, and highlight the statement
indicating that in signing the form the applicant agrees to the printed
19. The final step in reducing your collectibles is to talk to your
customers prior to actually doing business. Show them the policy and ask
if they have any questions about it. Explain what isn’t clear to them and
draw attention to those points you know from past experience can be
overlooked or misunderstood.
20. Remember, the purpose of your credit policy is to minimize bad debts
and collection problems, not eliminate them entirely. If you reduce your
bad debt losses to zero, your credit policy may be so stringent that you
are missing out on significant sales — and profits.

Posted by on August 29, 2000