Buddy Up

Know Thy Debtor

Do you know who your debtors are? Maybe not, says a veteran creditors' rights attorney. Many business owners fail to determine the legal identities of customers before extending credit, which can lead to uncollectible debts and even business failures.

Harold Stotland, partner in the law firm of Teller, Levit & Silvertrust PC in Chicago, acknowledges small businesses are getting better at checking out customers' creditworthiness, but says, "[They] often don't know if [the debtor's company is] a corporation, a partnership or a sole proprietorship. That means they're creating a debt and they don't know who the debtor is--who is legally obligated to pay that debt."

Proper documentation can rectify what Stotland calls "the biggest single violation of credit principles." He suggests using a form "that requires disclosure of the correct identity and composition of the legal debtor. That's the first principle of credit--determining who's responsible for paying the bill."

Beyond which, the partner in Chicago's oldest creditor's rights law firm points out, many businesses go on to make a second mistake: They fail to review the completed form to ensure it's been "filled out properly, if it's been signed, if the individual's official capacity has been stipulated and if all the information has been provided."

Why are businesses not more diligent? "They fear alienating customers," Stotland submits. "And that's a legitimate concern. Many customers may go elsewhere to avoid filling out lengthy forms. They look at the total package and question the cost of establishing credit with you--time, effort, interest charges. Credit and marketing go hand in hand. You must know what the market will bear in terms of credit demands and conditions. So keep forms simple, review them, and evaluate the cost of potential bad debts versus the cost of potential lost sales."

All things being equal, Stotland adds, "If the competition doesn't require customers to fill out detailed credit forms, they can open accounts more quickly and efficiently. That gives your competitors an advantage. But it's an advantage that may contribute to their eventual failure."

Contact Source

Business Filings Inc., (800) 981-7183, http://www.incorporating.com

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This article was originally published in the May 1999 print edition of Entrepreneur with the headline: Buddy Up.

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