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Small Business Survival Guide

Tips to Protect Your Business, Collect Your Receivables, and Thrive

Cash Flow is the life blood of your business and essential to the continued growth and success of any business. We have been helping small business owners deal with all types of issues for over 40 years. We understand the problems that small business owners face on a daily basis. This Guide was created to provide some guidance to our small business clients in maintaining cash flow and minimizing cash problems. We believe these tips will help small businesses develop a complete collections program.

EXTEND CREDIT CAUTIOUSLY

The first thing to remember is that credit is a privilege for the convenience of customers who abide by your terms. Credit is not to be a gift for everyone who asks for it. As a business person you must exercise trust and caution in equal measure in determining whether or not to offer credit to a customer or potential customer. There are some warning signs that the account is in jeopardy:

  • meritless complaints about your product or service;
  • the customer avoiding you and failing to return messages;
  • dramatic changes in the customer's buying patterns (an increase may mean the customer is losing credit elsewhere). When you see any of these signs occurring this should alert you to be extra careful with the credit extended to such a customer.
CHECK CREDIT HISTORY OF APPLICANTS

Conduct an effective credit check before you extend credit. This may be done by requesting credit references or financial statements from new customers. In the case of businesses, audited reports should be demanded, if available, to be sure that you can trust the figures you receive. The next thing that should be done is that the customer's references should be called and asked about the customer's credit history with that reference. In addition, you should ask this reference for two additional references. These additional references should then be called to get more realistic and more expanded information regarding this customer.

Many businesses only think of sales in dealing with new customers. This is a mistake that business owners do not have the luxury of making. Hold your sales personnel responsible for making credit inquiries at the time of sale and then follow them up before the sales are approved. All sales on credit should be made subject to credit inquiries.

CHECK OUT ALL NEW CUSTOMERS

Knowing the right things about a potential customer can prevent extending credit to a "bad" customer and can be of great importance if it becomes necessary to recover an account receivable from a "bad" customer in the future. For business customers the following are some important considerations to include in your company's credit application:

  • Get a complete business name of the customer, including any doing business as ("d/b/a") designations;
  • Obtain the full address of the customer including multiple addresses;
  • Check them out online;
  • Find out how long the business has been in existence;
  • Find out the form of the business (i.e., corporation, partnership, sole proprietorship);
  • Determine the names and addresses of the company's principals;
  • Obtain bank references and gather information as to the location of all bank accounts and checking accounts. This will be invaluable if it becomes necessary to collect money on a judgment;
  • Obtain the names, addresses and telephone numbers of other trade references;
  • Request an authorization to conduct a credit check of the customer (seek the signature of a company principal since a mere agent may not possess the authority to do so).
DEALING WITH BAD CHECKS

Bad checks are a fact of life in any business. However, they should be dealt with in the following manner:

  • if the check has been refused for the first time, re-deposit it after contacting the customer;
  • call the customer and ask that money be deposited to back the check and hold any further shipments to the customer;
  • if check is returned a second time, call the customer and request a cashier's check and hold all shipments to the customer;
  • if no payment is made in a week, move quickly to start your collection process using the methods and steps described earlier in this brochure.
DEALING WITH DELINQUENT ACCOUNTS

The following are some timely tips for continuing to do business with late paying customers

  • deny the customer credit until the account is up-to-date;
  • withhold providing the customer with products or services until a payment plan is established;
DON'T BE A BULLY

Limit your accounts receivable collection attempts to phone and mail contacts. Avoid making personal contacts with the debtor in order to collect. The Fair Debt Collection Practices Act places severe limits on what bill collectors can and cannot do to recover unpaid amounts.

USE COLLECTION FORMS AND LETTERS

Send a collection letter. Collection letters should contain the following items and qualities:

  • (a) the letter should be personalized and signed by the owner or the President of the company;
  • (b) state for the customer how much is owed and when it was due;
  • (c) remind the customer that he or she is violating their promise and commitment to pay you;
  • (d) convey urgency, that you want the payment made immediately;
  • (e) be sympathetic and supportive but firm;
  • (f) keep it short;
  • (g) don't threaten actions (including filing suit) you are not intending to take. Be honest and straight forward; and,
  • (h) make your letter courteous and professional.

If the customer is an individual the following are some important items to include in your company's credit application:

  • (a) Obtain the name and address of the customer;
  • (b) Obtain information of how long the customer has lived at his or her current address;
  • (c) Obtain information of where the customer works and how long the customer has worked for such employer (the length of time which one works for an employer gives an idea of the person's economic stability);
  • (d) Obtain information about how much money such customer makes;
  • (e) Obtain bank references of the customer;
  • (f) Obtain information regarding outstanding debts of the customer (including consumer credit, mortgage, home equity loans, automobile chattel mortgage, etc.);
  • (g) Request an authorization to conduct a credit check (such a request requires a signature of the person for whom such a credit check will be conducted).
ESTABLISH CREDIT TERMS UP FRONT

Make sure that your application states clearly the payment terms and that it clearly states that any orders will be accepted only after the requested information has been provided.

GET PERSONAL GUARANTIES

If you are extending credit to a corporate customer, insist on having a principal of the corporation, preferably the President or Vice-President, guaranty the debt of the corporation. This will provide an advantage to you in the event that you must sue the customer to recover the outstanding account receivable in that it will add another party from whom you will be able to collect a judgment. This will also give you an advantage in the event a corporate customer becomes insolvent. You will then be able to collect from a person, the principal guarantying the debt.

ISSUE ALL BILLS PROMPTLY

Send an invoice as soon as possible. The faster you bill, the faster you get paid. There is a direct relationship between how soon a customer receives an invoice after services are provided, and the success rate of collecting the account receivable. With each month that passes after the due date of an invoice, your chances of collecting quickly declines.

ISSUE DETAILED BILLING

With regard to invoices make sure that they are detailed and accurate about the products or services provided and the terms of payment. You should track the aging of your receivables so that you can easily identify potentially problematic accounts.

PROVIDE GOOD SERVICES

Deliver quality from the start. One of the most common excuses customers offer for why they haven't paid is dissatisfaction with your product or service. That is why it is so important to make sure you deliver high quality goods and services.

  • send orders C.O.D. and, with proper notice, consider adding a portion of the unpaid balance owed to you to the charge on the new C.O.D. order;
  • add any permissible late payment charges to the new invoice.
USE COLLECTION LAWYERS AS PART OF YOUR COLLECTION PROCEDURES (if all else fails)

If your collection attempts fail, turn over the delinquent accounts to attorneys experienced in collection practices. Professionals such as the experienced attorneys of BELLAS & WACHOWSKI possess the necessary skills and resources to assist in collecting your delinquent accounts.

These are just some of the suggestions we offer our clients as successful Chicago Business Lawyers. Our extensive experience and the range of services we offer as trusted advisors to small business owners are intended to help small business owners succeed. For an appointment to discuss the collection of your business's delinquent receivables and methods to improve your collection procedures, contact attorney George Bellas (george@bellas-wachowski.com).

BELLAS & WACHOWSKI
Attorneys at Law

15 North Northwest Highway, Park Ridge, Illinois
1-847-823-9032

www.bellas-wachowski.com

The AIn-House Counsel@ for Small Business Owners™
Serving Small Businesses for Over 40 Years