Collections

Would you give $1,000 out of your pocket to a stranger? How about $10,000? Or more?

This is exactly what you do every time your sell a product or service without first investigating the buyer's credit history. Giving them your product is the same as giving them your cash. You are not writing up a sale. You are writing up a potential loss.

"Sales people's time is extremely valuable," says Tom Spencer or Tom K. Spencer & Associates, a credit consulting firm in Alva. "If you haven't asked your credit department to research a lead, you are wasting the sales person's time and risking your capital."

Skeptical? Take note. Years ago Florida became known as a debtors paradise, a scam capital, a deadbeat state for non-payment of debts and obligations. Some areas are improving, but slowly. Our population's transitory nature still contributes to the perception that unethical characters can come and go as they like and not be accountable.

No one is immune. The one exception is if you do business on a strictly cash basis. Service businesses are especially vulnerable. Southwest Florida's construction, healthcare and software industries get hit often.

In construction, for example, folks come in from out of town, unlicensed, uninsured, uncertified and underbid the work, laugh all the way to the bank after pocketing an advance and leave someone else to clean up the mess. Pool installation and maintenance operates much the same. On the other hand, home owners call reputable air conditioning services in a panic when their air goes out, but two weeks later when the bills arrives, it goes to the bottom of the pile.

How can you protect yourself and your business?

Tapping into Tom Spencer's 40 years of rough and ready know-how is a good place to start. He's well versed in spotting credit risks, helping business owners protect themselves, and corralling delinquent receivables. When he's not servicing more than 80 commercial client accounts in-house, he's donating his time leading seminars at the Small Business Development Center.

Spencer likes small classes where participants focus on using simple loss prevention measures and troubleshooting individual problems. Three-hour sessions run down the "how-to's" you need to know and practice in account receivables.

"Multiple benefits accrue in running a clean accounts receivable operation," says Spencer. Low bad debt losses yield lower overhead, higher profits and more working capital. Cash talks. Established suppliers may give you additional discounts for an upfront or 15-day payment. So, your pricing becomes even more competitive. Employees, commercial clients, consumers, suppliers and bankers want to work with a sharp, tight shop."

Key tips for keeping accounts receivables in line include:

o Hire a professional, full-time credit manager or train a credit clerk to dog your accounts receivables start to finish. Cash due constitutes your largest single asset.

o Investigate a potential customer's credit worthiness before you agree to anything. Call commercial credit bureaus, bankers and suppliers. Share information at an industry association meeting of your peers. If the buyer is overseas, know that government's policy on state taxes and fees.

o Learn to read prospects. Their environment, personal appearance, vehicle condition and employee attitudes tell much about character and where the customer's business is headed. Are people happy and prosperous working there?

o Insist on a signed and dated credit application, including the applicant's social security number. Ask for a personal guarantee. Be clear on the terms and conditions of the business transaction. Keep it on file.

o Get good-as-cash payment on delivery if possible. At the very least, secure a signed invoice upon delivery of your product or service.

Will you run into rough spots? Sure. Though most people are embarrassed to admit they have problems. The worst thing you can do is let a bad debt ride and still keep selling (i.e. giving) your product or service to the same customer.

"People just don't like to ask for money that's due," says Spencer. "You need to decide. Do you need a friend? Or do you need the money? Following up on commitments is essential."

Here's how:

o Learn the art of collections early, before or after you get burned the first time. Your business may not be able to survive many losses. Building in a margin for anticipated losses in your prices to customers who do pay is a poor solution. It places you at severe competitive disadvantage.

o Establish a firm payment date and hold them to it. Be nice. Be persistent. Follow-up within two days of that date if payment is delayed. If you let it slide, you will go to the bottom of an accounts payable file. Professional business people gain respect for creditors who aren't a pushover.

o Visit the person who owes you in person. Use discretion, common sense and compassion. Find out why a payment is delinquent. If they're awaiting payment from their supplier or an incoming loan, agree on an alternate real payment date that will work for them. You may even help them get paid. It may take longer to fulfill your obligation, but it's better than paying a lawyer. Methodically follow up. Handle it well, and you'll likely get paid.

o For hard cases, send a certified demand letter with a heads up deadline on impending action by a collections agency, attorney or court of law. Be sure credit collections staff know pertinent state and federal laws. Your goal is to avoid litigation if possible, but you must be ready to make good on your promise.

o Be ready for small claims or circuit court with a rock solid case. Keep a logbook showing the time and date of every contact. Have copies of the signed credit application, signed work order for services, and signed invoice for delivery of hard goods. If the defendant can't produce a canceled check, your judgment should be cut and dried.

o As a creditor, your real work starts after you receive a legal judgment. The first step is to file a writ of execution with the Sheriff, who is authorized to pick up assets. Do your homework on the debtor. Be creative. What business assets exist? Get a lien or levy against buildings, equipment or vehicles. Be on the spot with your hand out when a big job or loan comes through. Get a writ of garnishment on wages (within restrictions), checking accounts or accounts receivable.

"There are ways, too, to collect on bad checks, or old judgments," counsels Spencer, "though those less than 90 days have the best shot. A good collector averages 40 to 45 percent on debts of a year or longer."

You'll know how to proceed when you pose the ultimate question: "How much can I afford to lose?"