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So the best defense against delinquent payers is having a procedure in place prior to taking on customers, according to Richard Baron, founding member of Farmington Hills, Mich.-based law firm Foley, Baron & Metzger P.L.L.C.
“Prescreening should include expectations for payment,” Baron said. “It should be laid out in any relationship with a customer or client. Make sure both you and (the customer) have a good understanding of the terms of your engagement with them.”
The terms of the agreement could include a deposit upfront, all the money upfront or even collateral, Baron said.
Background checks also should be done on the customer, he said, including checking the customer’s references, getting detailed information on the credit application, and even talking to other, noncompeting vendors to get an idea of his or her payment history.
Thomas Gross, owner of the Rochester, Mich.-based consulting firm Cornerstone Advisory Group Inc., said he requires a down payment on a credit card before starting a project, to ensure there will be no problems with collecting the entire amount.
Gross, who also runs The Advisory Board-Detroit, a peer advisory group for executives, said he advises his clients and members to do the same.
“If it’s a three-month project, I try to collect one month work payment in advance,” Gross said. “When you work with smaller companies, they’re not used to making down payments. But I tell people do not be shy to ask for down payments.”
If a relationship has already been established and a customer has not paid up, direct contact with the customer is the first step. A phone call followed by a letter, getting stronger with each communication, is usually the best way to start collecting payment, said Ed Deeb, president of the Michigan Business and Professionals Association and the Michigan Food and Beverage Association.
If all else fails, it is time to turn to a collection agency or attorney to collect the payment through the courts, he said.
But Deeb added that it is important to consider a customer’s situation, especially if it is a first-time offense. Customers who have had good payment histories could be struggling with issues such as late payments from their own customers, he said.
“From what our members are telling me, people they know that have been good customers over the years … there is the tendency to give a good customer a little extra time,” Deeb said. “But the understanding or working out of some type of agreement should be (the) exception to the rule. It depends on how good the customer is.”
But Baron added that it’s best to keep a careful watch on how the customer responds to being allowed extra time to make a payment. Seeking legal counsel might be a way to show a slower-paying customer about how serious the situation is, he said.
“When you’re getting the runaround, when promises are being made and not kept, don’t let it go too far,” Baron said. “The longer it lingers, the harder it is to collect.”
It’s also better not to let salespeople make decisions on extending credit to customers, Baron said. A company needs to have people in more objective positions to determine the terms of extending credit, he said. Plus it puts salespeople in a terrible position to have to establish a payment agreement that protects the company while trying to make the sale, he said.
In situations that involve large amounts of money, becoming a secured creditor also can help avoid bad debt, said Jeffrey Fleury, an attorney with Stark Reagan P.C. in Troy, Mich. That involves attaching the work to actual collateral, such as real estate, a machine, stocks or other tangible properties, Fleury said.
Editor’s note: This article is reprinted from a series of online business tips from Crain Communications, copyright 2006.
Publication date: 01/22/2007