What impact do customer contracts have on bad debt collection? They are your most important tool.  They often make the difference in your ability to collect a debt, or in your collection agency’s ability to do so. Customer contracts are often the very thing that convinces a customer to pay. Similarly, lack of customer contracts can be used as a reason not to pay you.

You must have a signed contract to charge interest on past due balances. If you simply put it on your statement it does not count. You need to be able to prove that the customer agreed to pay interest on old balances. The same holds true for the cost of collection. Each state has different laws regarding your ability to recover it, but in all cases, you must have a signed agreement that pre-dates your transaction.

If you wait until after the transaction, and your bill goes unpaid, it is, as my mom used to say, “Closing the barn door after the cows have gotten out”.  Good solution, but too late to be of any use.

Yesterday, I received a request to collect a large bill that is owed by a company that has gone out of business.  They had a contract, but it is of no use because the company and its assets are gone. In this case, a personal guarantee would have made all the difference. A personal guarantee is a contractual promise by the owners that they will personally pay the debt if the company goes out of business.

When I was thinking about writing this blog, I thought that a good analogy for the solution that comes too late, or trying to enforce contractual terms without a contract would be to compare it to putting in a sprinkler system after a fire.  However, while yes, you would not be able to prevent a fire retroactively, you could learn the lesson and install sprinklers to prevent future fires.

So it is with your customer contracts. If you do not have one, get one today. If you have contracts, update them annually. If you work with businesses, make sure they sign a personal guarantee before extending credit.

In other words, close the barn door before the cows get out, not after!