Money trees

4 tips to stay in the green and avoid business debt

Thought Leadership on Banking and Commercial Transactions presented by Weinstock, Friedman & Friedman P.A

The key to managing your unpaid accounts receivable is to not have any. That’s easy to say, of course, but much more difficult to do. However, when you employ these four strategies at the outset of the customer relationship, you will greatly reduce the chances of incurring bad debt, and greatly increase your chances of collecting that receivable when or if it goes bad.

Top four strategies successful businesses use to minimize bad debt before the relationship even begins

  1. Do your due diligence

Business, like all dealings with people, is based upon relationships. So before you enter into a relationship with someone, do your best to know who they are. The internet is chock full of valuable information about people and organizations you are doing business with. So it is critical to your business to go into the relationship with your eyes wide open.

First, check to make sure the organization exists as a legal entity. You can make an inquiry with the Maryland Department of Assessments and Taxation. Also make sure the business is properly licensed. If it is a Maryland business, you can find that information with the Department of Labor, Licensing & Regulation, and the Department of Business & Economic Development. If it is an out-of-state business, most states have a similar entity that will allow you to check the licensing status via the web.

Next, check their credit. If you are entering into a business relationship with someone, it is likely you will be extending credit at some point. So it is important to check the credit of your potential customer. The credit report can show you possible red flags that you otherwise might not be able to detect without that information, such as a history of late payments, or a lack of creditworthiness.

Get bank references. Your customer’s ability to deal with their own finances will show you how well they will deal with yours. Plus that will give you the added bonus of knowing where they bank, which is a possible source of collection if the account goes past due in the future.

Check social media. There is a wealth of information on social media, both for individuals and for businesses. You will see what kind of person you are actually dealing with, and not just the business persona put forth by the principals of the business. You will also get a sense of the business’ culture and make-up.

Get a financial statement. The collection of information on the front end of the process will help you greatly in the event the relationship goes sideways and you end up with an unpaid account. Knowing the financial information of the other party will help you see potential problems and pitfalls before they arrive, and will help you solve the problems that you did not foresee.

  1. Create a policy for handling accounts receivable, and stick to it

If you create a policy for dealing with past due accounts, and stick with it, you will certainly be a happier business owner. Having a policy in place puts everyone on notice as to how past due accounts are going to be handled. Think about quick turnover for past due accounts. The longer an account is allowed to get stale, the less likely you will get paid. Also think about how you are going to penalize past due accounts. Will there be interest accruing? Will there be a late payment penalty? Will there be an early payment discount? If you have to sue, will you be entitled to legal fees and costs? Spell all of those things out in your business forms, and do it in multiple places, so there is clarity, redundancy and backup.

Plus, when the customer knows up front what the clear policy is for handling past due accounts, and you stick religiously to that clear policy, it will make it easier to turn that past due account over to counsel for collection while minimizing the strain of that past due account on the customer relationship.

  1. Update your forms 

Business forms are a hotbed for trouble when it comes to legal problems. Many businesses have created forms they have used for years, and have not updated the forms to adapt to the present business climate. Think about how much our businesses have changed in the last decade. In 2005, Twitter did not yet exist. Facebook was barely a year old. The iPhone was still two years away from its release. Today in 2015, we cannot imagine conducting business without these tools. And yet many businesses are still using the same forms they used back in 2005, or even earlier. Using antiquated forms could be a ticking time bomb for your business.

So a smart strategy would be to have your lawyer or Weinstock Legal look at the forms you use and see if any need to be adjusted, updated or maybe even require a complete overhaul. Start with your credit application. Make sure it collects all of the information you need, like SSNs, DOBs, bank account and other financial information (which you can use later as a collection tool). Think in terms of not only what information you need to start the business relationship, but what information you might need to end it. Know what the so-called fine print says. Look at sales order forms, purchase orders, invoices, and other forms you use every day. Also, the receivables policy that you created in #2 above should be reflected throughout these forms.

  1. Have your counsel lecture and train your sales team and your accounts receivable department

No one can train your sales people on what to do to avoid legal messes down the road than the people whose job it is to clean up those messes. Prevention on the front end will save loads of headaches on the back end. If your sales people are trained in what to look for, what to say and do, and what NOT to say and do at the outset of the relationship, your business will be in a better position to avoid getting into a bad customer relationship. If you have in-house counsel, use them for this purpose. If you don’t have in-house counsel and you need a consultation, this is the time to do it. Many of them will be happy to do it, and some will even do it at a reduced cost or no cost at all.

Employing these four simple strategies in your business can help pave the way to a happier, healthier and more profitable business. To learn more about the next step contact Bill Thrush at Weinstock Legal.

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