Multitasking, Business-style

10 steps for improving accounts receivable collection

By Jon-David Giacomelli

April 8, 2011

Ensuring accounts payable success.

Today’s shop owners wear many hats, including machinist, fabricator, programmer, HR manager, and chief cook and bottlewasher.

Quite often in today’s small and medium-sized shops, it’s not enough simply to do great work in an efficient manner. If the fine details of running a business are ignored, it will become difficult to compete in the ultracompetitive world of manufacturing.

If your company is owed money for goods or services delivered, these 10 steps may be of assistance in ensuring that your account is paid and in a timely fashion.

1. Act Quickly

Lawyers and collection professionals agree that acting quickly to collect aged receivables legally is important. This may be the most direct and effective measure that any company can implement to increase the success of its accounts receivable collections.

The old adage that, the squeaky wheel gets the grease has significant truth to it. Debtors prioritize. The most persistent and progressively insistent creditors tend to get paid first. Forbearance and flexibility are sometimes appreciated but are more often taken as a sign of weakness. Hence, the general rule is: Act first and get paid.

2. Implement and Follow Collections Protocol

Your business must have a clear written protocol in place for collecting overdue accounts.

Typically, this means writing a few different overdue collection letters. The consequences of failure to meet the terms of these demand letters should be immediate and decisive action commensurate with the terms set out in the progressively aggressive letters.

If suitable payment arrangements cannot be achieved by one to three pointed letters, the account should then be referred immediately to legal counsel. A lawyer’s letter is often all that is required to illicit payment.

However, there is usually little benefit to your lawyer sending more than one demand letter. The lawyer’s demand letter should clearly state the day upon which legal proceedings will formally commence. Further, the letter should set out the costs consequences to the debtor in the event that legal proceedings must be started.

One of the keys to the success of any commercial collections protocol is that threats are followed by action. Obviously, any collections action must be somewhat flexible, but this flexibility must be exercised judiciously and sparingly for the system to function optimally.

3. Have a Lawyer Review the Contract

An important, but inexplicably often ignored, method of increasing your company’s chances of successful collection is to ensure that the written contract terms are favorable to your company.

A great deal of business is transacted with faulty pro-forma contracts and invoices, the terms of which do not adequately protect the interests of suppliers of materials, services, and products. The standard boilerplates your company uses should have a significant impact on commercial collection success.

Contract documents should be reviewed or drafted by knowledgeable legal counsel and should include clear terms governing payment due dates, interest rates on overdue accounts, and your company’s contractual right to substantial indemnification costs in the event that commercial collection proceedings are necessitated.

4. Get Personal Guarantees

There is a natural hesitance to ask clients for personal guarantees for corporate indebtedness. The fear is always that the client will simply shop elsewhere. While this is a legitimate fear, it is probably fair to say that little harm comes from asking, and a great benefit may be achieved if the personal guarantee is obtained.

Often those in need of the supply of parts, services, or materials will cheerfully agree to sign personal guarantees when economic conditions are favorable. It is important to have this written guarantee drafted or reviewed by a competent solicitor because desperate debtors often attempt to challenge or void such guarantees.

5. Look Before You Leap

Too often commercial litigation lawyers are process-oriented; they plunge ahead with claims without first performing an array of investigations to determine if the defendant is a potentially solvent entity. Before launching an action, your lawyer should:

• Perform a bankruptcy search to ensure that the company is not bankrupt.
• Ensure that the correct entities are named in the statement of claim.
• Confirm it is still in business.
• Perform a Web search, which often indicates subtle changes in corporate name or location.
• Do a credit search. 

Thousands of dollars in legal fees may be avoided if these types of searches are performed before litigation begins and periodically throughout the litigation process.

6. Choose the Correct Jurisdiction

It is important to have a basic knowledge of the various court levels in which claims of creditors may be advanced. In Ontario, for example, claims of up to $25,000 should be brought in Small Claims Court, which is a division of the Ontario Superior Court of Justice.

Claims between $25,000 and $100,000 should be brought in Ontario Superior Court of Justice under the “Simplified Rules” of Procedure.

Claims above $100,000 should be brought in the regular jurisdiction of the Ontario Superior Court of Justice, unless the parties agree to proceed under the Simplified Rules.

The main differences among the various levels of court relate to costs consequences and complexity and formality of proceedings.

You should consult local counsel in your province for details on the jurisdiction of the various levels of court.

7. Increase Your Leverage — Offer to Settle

From the customer’s perspective, in commercial collection litigation it is almost always a good idea to make an offer to settle as early as possible in the proceedings.

8. Settle With Conditions

Too often creditors enter into simple forbearance agreements with debtors which, when ignored, carry no consequences to the debtor. It is often an intelligent use of fiscal resources to settle commercial collection litigation on the basis of a payment plan.

However, such payment plans should always be accompanied by a series of detailed, well-defined consequences in the event of default. For example, at a minimum the following should be included in any Minutes of Settlement:

• The debtor should sign a consent to judgment to be held in escrow pending full payment of the account. This provides the creditor with an automatic judgment in the event that the debtor defaults under the payment plan.
• The settlement agreement should include an acceleration clause, which indicates that in the event that one payment is missed, the entire remaining payments become due and payable immediately.
• The timelines for each payment of account should be specifically set out with a very brief grace period for nonpayment.
• A clause should be included to ensure that interest is accruing during the payment period.

If a debtor balks at signing a settlement agreement with these terms, it may be a sign that the debtor does not intend to honor its commitment.

9. Have Your Lawyer Perform a Judgment Debtor Examination

Once you have secured a judgment against the debtor it is often a good idea to ask your lawyer to perform an immediate examination in aid of execution (also called a judgment debtor examination). In essence, this allows the creditor to ask about virtually anything relevant to the debtor’s ability to pay the judgment, past or future.

10. Take Full Advantage of Rights of Execution

A judgment is indeed a powerful thing. A judgment creditor is entitled to take intrusive action to recover the amounts owed.

Most commonly, judgment creditors issue one or more writs of seizure and sale indicating the amounts owing and the postjudgment interest rate in the various jurisdictions in which the debtor has or is suspected to have assets.

A creditor is also entitled to garnish any debts payable to the debtor.

Know Your Rights

These steps merely scratch the surface of what may be done to collect your company’s difficult accounts receivable. It is important to consult a lawyer who is competent and knowledgeable in the area of creditors' rights to take full advantage of the plethora of investigation and execution methods available to you.

For more information, visit www.cambridgellp.com.