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When
you run your own business, it is inevitable that, sooner or later, someone
will start making payments slowly, or not at all. Sadly, there are some
people out there who will flagrantly breach their contracts if they think
they can get away with it. Even nice, ethical business owners can get
themselves into situations where there just isn't enough cash on hand to
make everybody happy.
The
best time to avoid bad customers is right upfront, before you start doing
business with them. Your customer agreement should state clearly and
precisely:
-
When
payment is due
-
How
payment is to be made (for example, by check or wire transfer to your
bank account)
-
What
will happen if payment is not made in timely fashion (for example, you
have the right to cease working, you have the right to repossess what
you've sold them)
-
That
interest at a penalty rate (3 or more percent over a bank's prime rate)
will accrue and be charged on any overdue payment.
It
is amazing how many contracts are silent or vague on these essential points.
So
now, despite your best efforts, it has happened: one of your customers has
started paying slowly, or has stopped payments altogether, or is claiming
that he is waiting to get payment from someone else and then he will pay you
promptly. What do you do now?
Whether
or not you are willing to negotiate with the debtor, you are not likely to
get anywhere unless you first get the debtor's attention by demonstrating
that he ignores his obligation to you at his peril. If you still are
providing goods to a financially troubled customer on a regular basis, or if
you are in the middle of a big project for a troubled client, the first
thing you should do is stop. Big debts almost always start out as little
debts, which become bigger and bigger as a business frantically keeps
working for the customer in the vain hope that the situation will turn
around. In the meantime, the business ignores other customers who are ready,
willing and able to pay their bills on time.
If
you have no leverage over your delinquent customer, you must become one of
the "squeaky wheels" that gets their attention. Most debtors will
find a way to pay off a creditor they fear, or who makes a bloody nuisance
of themselves, especially if the debt amount is small.
You
should not hesitate to call your debtor frequently and persistently until
they respond. The federal Fair Debt Collection Practices Act and related
state laws provide some guidance on what you can and cannot say in a
collection call. A lot of these guidelines, however, apply only to
collection agencies and consumer debts and do not prevent a small business
from aggressively pursuing its own debt, especially if the debtor is another
business.
You
may threaten to file a disparaging report against the debtor with the major
credit bureaus, as long as any such report is 100 percent true and accurate.
If it isn't, your debtor may be able to sue you for libel, slander or
violation of fair credit reporting laws.
Have
your attorney send a "demand letter" stating your intent to sue
the debtor if something isn't worked out to your satisfaction by a certain
date. If the debtor is located in a faraway state, hire an attorney in that
state to send the letter so the debtor knows you are willing to pursue him
on his own home turf. Better yet, have your attorney send a draft summons
and complaint (an actual court document) with the letter, and a demand for
response in seven to 10 days in order to avoid litigation.
Finally,
be prepared to sue, even if it's in small claims court. Of course, there is
no guarantee you will win, but troubled debtors can usually tell if you are
bluffing when you threaten to sue, and it's amazing how quickly their
attitude adjusts when court papers are actually served. Make sure they know
you are willing to make everyone's lives (including your own) miserable
until you receive satisfaction.
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