Words that are worth a fortune: Learn the language of debt collection

Terms you might come across when dealing with Collection of Outstanding Debts

To make it a little easier to navigate the world of accounts receivable and debt collection I will, once or twice a month, define terms you will come across during the process of collections or a small claims court action.

Some of these terms will be familiar to some of you, others may have heard them but be unsure of their exact meaning. So simple ones or not I hope to cover them all eventually. Let’s start with fairly common ones:

Creditor: If you are owed money and have not been paid, you are a creditor.

Debtor: If you owe money and have not paid by the time payment was due, you are a debtor.

Collection Agency: Everyone knows this one right? They are the folks that call you and ask you to pay what you owe their client. So anyone you engage to collect what is owed to you is a collection agency, correct?

Well no, actually that is not correct. The person contacting a debtor can be a Collection Agency, or a Law Office (Lawyer or Paralegal) or a third party acting on behalf of the creditor.

So what is the difference?

Collection agencies are companies that are licensed by the government and have to comply with specific rules. In Ontario they would be operating under the Collection Agency Act. Each of the collectors working for them would also have to be licensed individually under the same Act.

What do they do?

They are allowed to contact debtors in writing and on the telephone and make demands for payment as long as they comply with rules under the act . They can also report a debtor to credit reporting agencies like Equifax or Trans Union .

What do they not do?

They are not allowed to file court claims or appear in court on your behalf, or take any other legal steps. Once it reaches that stage they have to assign it to a legal professional.

Law Firms– Lawyers & Paralegals -are licensed and regulated by the Law Society of Ontario. They generally do not make collection calls or send out a lot of letters. But they will send out a demand and take legal action through the courts on your behalf to recover what is owed you.

Firms that are experienced and do a lot of collections work will contact the debtor before taking any court action and make a determined attempt to resolve the matter. They also report judgments to credit reporting agencies like Equifax, and continue working to collect your money after a judgment if it is still necessary.

Third Parties – Creditors will often have someone they know or have a relationship with contact the debtor. This could be a friend, an accountant or maybe just someone who is very experienced in business.

What are they allowed to do?

Nothing. Unless they are a licensed collection agency or a member of the Law Society they are not permitted to take collection action or appear in court on behalf of someone else. Furthermore, it may make matters worse and more difficult when you finally do hire a professional.

Use credit to get paid faster

When giving credit can help solve an issue with your client

We have all been there; the service has been rendered and the invoice has been sent out. The invoice due date has come and gone and you still have not been paid. Perhaps you have already called and spoken to your customer in the past and gotten a promise that payment was coming out soon.

Soon has not come and neither has the payment. So you contact your customer again and this time, to your surprise, the customer complains about the quality of the service or the delivery date.

You check your records and see that this has never been brought up before, everything was just fine. As far as you are concerned there was nothing wrong with either the product delivered or the service. It looks like a belated excuse not to pay your bill.

At this point some business people will issue a credit or reduction of their invoice just to get it paid and get thiswrapped up.

Clearly this will eat into your profit margin but it might be worth your while so you can get the matter resolved in an amicable fashion without wasting too much time and money.

Issuing a credit: doing it right

The idea of issuing a credit on an already issued invoice is to get the customer to not only pay, but pay quickly and not give you any more headaches. You want the credit to have the desired effect and also protect you from a client who will take your credit and still not pay you!

What your credit should look like

Make sure you show the original amount due, the date when it was due, and the amount of your credit ( say 10% or whatever you agreed on) and then the new total balance.

Last but most important stipulate a deadline by which the balance must be paid, failing which the credit is withdrawn and the amount due will revert to the original balance. This will motivate your customer and also protect you down the road from being stuck with your lower amount should you have to take 3rd party action to get paid.

You should require your customer to pay you within 7 days of getting the credit, make it a win -win settlement.

How to protect yourself from bad debt | Part 3 | Strengthening your position

Extra steps to really strengthen your position

In addition to the measures that we’ve already discussed in Part 2, you may want to request the following:

Applicant’s personal guaranty(s) with spouses if possible. Many prospects might balk at this but it is your right to ask for it in return for granting credit. This way if the company closes down for any reason you can look to the owners/directors for payment.

I have had many of our clients (accounting firms for instance) put this in their engagement letter or agreement because they often deal with clients that have multiple companies. After awhile the work begins to snowball and often the service provider is directed to bill a company that may not have any assets or that suddenly has wound down leaving many hours of work unpaid for.

Another piece of information I highly recommend requesting is the SIN # and date of birth of the owner/director and authorization to pull personal credit report.

Agreement for you to verify the information on application from external sources (banks, trade references, credit bureaus, etc.)

Last but not least is the signature of the person, his name spelled out underneath (good luck reading most signatures) what position applicant has with company and that he/she is authorized to bind the company/corporation.

What if the prospect refuses to supply the information requested?

Sometimes prospective clients may start complaining about the application or specific parts of the application. If that happens you could rely on the old “This is our company policy for any shipments /service that has not been paid for “

If you are concerned that you might lose the business and you assess the prospect as being credit worthy you might loosen the requirements on such things as a personal credit report or guarantee .

Some might not want to pay interest on past due accounts. You could then change it to ‘ interest will be charged if it has to be turned over to a third party for collections.’

It is also a good idea to get them to initial those clauses you really want enforceable such as their guarantee, agreement to pay collection fees etc.

There is always a middle ground to be found, but remember the more you have on your credit application the easier it will be to collect your money should something go wrong.

What else should I do?

I recommend updating your client’s credit and banking information once a year or certainly every two years. Problems can come from new clients but sometimes even from long standing clients.

Is there a new CEO?

Has their bank changed?

Has the company been sold?

Has the company merged with another company or just changed its name?

Are there associated companies that use your product/services but are not the ones issuing purchase orders?

Another helpful and fairly simple thing to do is to make a copy of your customer‘s check when it comes in and pop it in their file for your records. It may come in very handy in the future.

Do it at least once or twice a year with regular customers.

How to protect yourself from bad debt | Part 2 | Know your client

Last week we discussed what you should be looking at before granting credit (see last week’s post) and that certain steps need to be taken. This week we answer the question –

What are those steps?

Well for starters you want information. So back to where we started from; have your prospect fill out a credit application. It won’t guarantee you’ll get paid but it will make it much easier for whoever you use to collect your money to do a more effective job.

Think of what a bank asks you for when you open an account or take out a loan. They are selling you money and they want to know all about you. Your prospects may not want to answer that many questions but you should get the basics.

There are many different types of credit applications available commercially. Pick one that suits your company best. Are you dealing solely with businesses or do you service consumers? Perhaps you do both. Whatever you do your credit application at a minimum should have:

Legal Name and address of the prospect

Operating name (if different) Name and address of any parent company

All contact information: I e: phone #’s, e-mail addresses etc.

How long in business

Names of owners/principals/directors/officers

Bank references -Name of Bank, Branch address +copy of void cheque

Three Trade references – with name of person and position at company

Your terms of payment

Applicant’s agreement to payment terms, to interest on past-due amounts

and to pay for any legal and collection costs

Next week…some additional steps to strengthen your position and further lessen your risk

How to protect yourself from bad debt | Part 1

The dilemma: Just ship it or Cross those T’s and dot those I’s ?

“I’m about to close this guy. Asking him to fill out a Credit Application will just spook him.”

Sound familiar? It’s what I call the Sales Dept. vs Credit Dept standoff.

Your salesman just wants to close that deal, and you want the business. He is ready to sign on the dotted line so why not go ahead, it can’t hurt, right?

Well maybe, maybe not.

In my experience there is often tension between the salesman and his credit department, that is loath to let the product or service go out without being completely sure the customer is credit worthy. So who is right?

The answer probably lies somewhere in the middle. You do not want to be so restrictive that you push away the prospect. On the other hand a sale or a new contract where the invoice will wind up not getting paid is not worth having.

How can I guarantee I won’t get burnt?

There is only one way – make sure you get paid up front or when you deliver your goods or services.

Short of that you will always be taking a risk when you extend credit and there is no 100% safe guaranteed way of extending credit. But there are ways of minimizing the risk to your company by taking certain precautionary steps. These steps will do two things:

1 They will leave you better informed as to who you are dealing with and allow you to better assess the risk you are taking.

2. They will give you a wider range of options and allow you to take more effective measures should your customer /client be unable or unwilling to pay your invoice.

You are in the driver’s seat when it comes to how much risk you take on and what terms and conditions you place on those risks. The trick is to determine what the right balance is for you, because the more onerous the terms and conditions are the more likely you are to lose certain prospects. There is an inverse proportional relationship between tight credit requirements and volume of new customers.

Some businesses will not do business with a prospect unless they feel very secure, and they require a fair bit of information from prospective customers while others are more relaxed about it. Some businesses even require a commitment by the owners or principals of the company they will be providing services for.

What is the right level of credit to be granted and how do I protect my business from getting stung?

The first thing you need to do is determine the level of risk you can afford to take. One consideration is general and one is particular to you. Let’s start with the latter.

Different people have different comfort levels when it comes to taking risks. No one wants to lose money but some folks can roll with the punches and others are risk averse and will lose many a night‘s sleep over the very same issue.

So you as the Owner, or Controller, CEO, COO, etc. either alone or with a board of directors have to decide on how much risk your company is comfortable with.

A good example of this is mortgages. Until very recently, your best option, financially, was an open, variable mortgage. It gave you the lowest rate possible. The numbers were right there for all the world to see, yet many people preferred to pay more for a locked in mortgage so they have the peace of mind of knowing they would not get caught by higher rates when a change came.

The second factor to take into consideration is more tangible. What are you selling and what is it costing you? What do you have to lose?

If you are providing monthly window washing services to various businesses, you may do very well but each invoice is for a relatively small amount and your risk is spread out over a large number of customers and fairly small. In his case you could afford to take some risks

If you are in the jewellery business or sell other high ticket items, you have a much higher built in cost and risk with each sale. You need to be more cautious in this scenario. Naturally there is a wide range in between these two examples.

You might also be primarily investing your time. Perhaps you are a consultant or therapist. How much time are you willing to risk?

Keeping in mind that most customers are honest and the delinquent accounts will – hopefully- only amount to small percentage of your overall sales. So the question is what can you afford to lose?

That does not mean you should ever let a non paying client off the hook (unless it’s your relative perhaps) but it will determine how tight your requirements should be and what steps you may need to take.

Charging interest on your invoices: pros and cons

Tip #2- Interest on Past Due Accounts: To State or not to State -What’s the point?

Well, the point is to motivate your clients to pay you on time and before other creditors. When you extend credit to a customer you are extending a courtesy. Some might argue you are doing it to get the business. That may be true, but it is also true that you are doing your customer a favor. With that favor come terms; you get to set the terms as the credit grantor.

What should the terms be? They can range from COD to payable on receipt, to 60/90 days. It is completely in your hands but you should be guided by practical considerations such as your industry’s norms and how credit worthy your customer is.

Past due invoices hurt your cash flow and cost you money. You should be compensated for that and let your debtor know in advance that you expect to be by charging interest.

Won‘t that alienate my customer?

Not really. Experienced business people are used to seeing that and understand they need to pay on time.

Should I insist they pay the interest too when they pay late?

Unless you are a large organization most waive the interest as long as the payment is not seriously delinquent. An invoice that is due upon receipt and is paid in 90 days should have some interest payable, but most of my clients will let it go unless it has been turned over to a third party for collection.

Is it legal to charge interest?

It is as long as there was an agreement before hand that you would charge interest on past due accounts. This isusually accomplished by stating it on your invoices, order confirmation, and credit application if you have one.

So as long as I have it on my documents I’m ok?

Yes and no. It will motivate your client but to make it enforceable in court you need to have it stated in very specificlanguage per the Interest Act or a judge will only award you a low court rate of interest.

You must spell out the specific monthly rate you are looking for AND the annual rate.

Eg. 2% per month (24% per annum) will be charged on past due accounts.

Is there a limit on how much interest I can charge?

Yes, anything more than 59% per year is deemed usurious, but judges will often not grant even lower rates if they deem it too high. I usually recommend to my clients that they stick to 2-2.5% per month (24-30% per year)

Just make sure you word it correctly.

Should you offer a discount for early payments?

Anyone in business will wince when they hear the words “aged receivables” or ” past due invoices”.

We’ve all been there. Clients are always in a rush to get their orders filled or services rendered, but when it comes to paying the invoice…not so much.

Suppliers want their invoices paid in a timely fashion but not at the cost of alienating a client.

The terms of payment usually appear on your credit application (more on that at a later date) and on your invoice and contract, if you have one. Standard terms for credit grantors as we all know is usually 30 days. We also all know that customers rarely pay before then and in most cases will pay well after the 30 days.

The solution?

One of the oldest and most accepted ways of motivating clients to pay sooner than later is by offering a discount on the invoice. Usually, it appears as a term on the invoice – 2%/10 Net 30.

Your customer can get a 2% discount on his bill if they pay in 10 days. Some only offer 1%.

QuickBooks on line offers some guidelines at: https://fitsmallbusiness.com/early-payment-discounts/

They suggest you look at several factors:

Are your competitors offering a discount? If so how much?

What is the standard in the industry?

As they put it –

“If it’s industry standard to offer discounts or your competitors are offering them, then you may be doing yourself a disservice by not offering a discount. You should match your discount to your industry standard or your competitors’ terms, unless you offer some other advantage to customers (e.g. faster shipping or lower base prices).”

Has the client paid on time in the past?

“Your client’s payment history will also come into play. If you have a customer who already pays early, there may be no reason to offer them a discount. On the other hand, if your customer habitually pays late, this may incentivize them to pay early for a change.”

Still Not sure if this is for you?

Here are several good reasons it might be.:

You’ll get paid faster.

You’ll increase your working capital.

And most importantly you will avoid having a bad debt and possible write off. The longer you wait to get paid the higher the possibility you will not get paid at all.

So What’s next?

If you don’t have these numbers yet, review your accounts receivable and generate an aged list. That is, divide them into those clients that are current, those that are 30,60 and 90 days past due.

How many clients are in each category?

If most are current to 30 days you are doing really well.

If most are 30-60 days you are still doing pretty well but you may want to motivate them by offering a discount in the future.

You might want to add 1% or 2% /10 -net 30 to their invoices.

I recommend calling or emailing their accounts payable department and letting them know about this great opportunity for savings your company is offering them.

90 days plus

Generally, any accounts 90 days and over are a problem and need to be dealt with separately with a collection protocol.