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Dont Be Taken For A Ride

Develop solid credit and collection strategies to make sure you get the money you've earned.

It's every business owner's nightmare: Your new business is doing well. You've filled a niche, feeling like you've established rapport with your customers along the way. Then, inevitably, someone doesn't pay.

You wait. You send another bill. Maybe you even call. Still nothing. It's clear the check is not in the mail. So what do you do?

Persevere, says Dr. Jeff Labinger, co-owner of Landin-Labinger Chiropractic in North Highlands, California. Labinger, who has been in business 13 years, religiously sends out bills on past-due accounts and follows up with phone calls. Most people, he has found, will pay with some prodding. In fact, one former patient, whose account was several years past due, finally paid recently after receiving another phone call about his bill.

It's also important to make sure people know they can make partial payments, says Labinger, pointing out that some of his patients were, surprisingly, unaware of that fact. Unable to pay the entire balance at once, many let their bills languish.

As long as the patient makes some attempt at payment, Labinger won't call about payment or turn the account over for collection. "Even small payments are fine," he says, "as long as they're consistent."

On the other hand, many business owners mistakenly believe that they must accept partial payments, no matter how small, says John Vaughan, a regional manager with TRANS-WORLD Systems Inc., a national collection agency. Actually, the amount of the partial payments must be "reasonable," something which varies according to the amount of the debt, Vaughan says. If someone owes $1,000, for instance, a $20 monthly payment isn't "reasonable," since the interest accruing on the debt is probably more than each payment.

"But a little compassion is not a bad thing to have," says Vaughan, acknowledging that some people may not be in a financial position to make larger payments.

Labinger would rather accept even as little as $1 a month than be forced to take legal action, an experience he has found to be ineffective. A few years ago, he took several former patients to court--and actually won the cases--but still hasn't been paid; and for each case, he also had to fork out court costs. These days, court fees can range from $200 to $1,500 per case and must be paid up-front by the creditor attempting to collect, Vaughan says. Because the creditor stands to lose that money, in addition to the original amount owed, Vaughan advises making sure the debtor has accessible assets, such as cash or property, before hauling him or her into court. Otherwise, a judgment in your favor really isn't worth all that much.

"What you'll have is just one more piece of paper that says the debtors owe you money," says Vaughan. "But you still don't get the money."

However, not all unpaid bills end up in a legal standoff, especially if you take the proper steps to protect yourself by setting credit strategies early on. It's best to have customers who are paying on credit go through an application process, including the signing of a statement agreeing to pay the costs of collection, if necessary.

Vaughan believes verbal agreements can hold up in court if they are usual and customary for your type of business. However, he cautions, it is always best to get a signed agreement, or suggest that the customer pay by credit card and get the person's card number.

Customers whose accounts are 30 days past due should be sent a polite but to-the-point overdue notice, followed by a phone call. When calling, Labinger reminds patients of the terms of their agreement and tells them that they must pay.

Usually, people respond by saying they don't have the money. "We've heard every excuse in the book," he says. "We just tell them we'll call back in 10 days. And we do."

"After 60 days pass without payment, your customer has shown he really doesn't care about his debt, or is having serious financial trouble," Vaughan says. This is the time to send another past-due notice, indicating that you are considering turning the account over to an attorney or collection agency. "It's against the law to threaten collection or legal action and then not follow through," says Vaughan, explaining why you must say only that you are considering such action.

If and when the time comes, hire a collection agency licensed to collect in the state where the debtor lives, advises Vaughan, because most collection agencies are licensed to operate only in one or two states. A collection agency not licensed to operate where your customer lives will probably use a subcontractor, licensed in that state, to do the work. The disadvantage to you is that the commission will be split between the agency you hired and the subcontracting agency. "What incentive is there for that agency to collect that account when they've got dozens of accounts promising full commissions?" asks Vaughan.

You can also increase the amount you will actually receive by selecting an agency which charges a flat fee per account, rather than the typical 30 to 50 percent of the debt.

You can expect to wait as long as 45 days from the date the debtor pays to actually receive your money, because federal regulations require collection agencies to place the collected funds in a trust for 30 days. This protects the debtor in case his nonpayment was due to a dispute over the quality of service or merchandise received. It also protects the creditor by allowing time for checks to clear.

In anger, you may be tempted to damage the debtor's credit by reporting the nonpayment to credit bureaus. Vaughan cautions against this; if the debtor has to get a loan in order to pay you, damaging his credit only makes it more difficult for him to get the loan. If he can't get the loan, you don't get paid either.

No matter how well you plan, sooner or later every business will be faced with the prospect of collecting a debt. But if you're diligent and know what pitfalls to avoid, you can expect to collect all, or at least most, of the money you've earned.

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