You can significantly reduce debt collection costs with a customer contract before you grant customers credit. However, too many small business owners do not have a written contract in any form. If you wait until after the transaction, it is, as my mom would say, “Closing the barn door after the cows have gotten out”. Good solution, but too late to be of any use.
How do customer contracts help debt collection?
Customer contracts 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.
Can I use an oral contract?
Oral contracts are legal in Maine and in many states. However, an oral contract leaves the terms and conditions open to interpretation. Take it from me – when people owe money, they may “remember” the terms differently than you do. Get it in writing!
How about finance charges?
You must have a signed contract to charge interest on past due balances. Business owners often tell me their finance charges are on the invoice. Your customer will not see the invoice until after the work is done. That is too late! You must prove that the customer agreed in advance to pay finance charges.
What about the costs of collection – can I pass them along?
You need a contract to recover costs of collection, that is attorney fees, collection agency fees and such. Each state has different laws regarding your ability to recover it, but in all cases, you must have a signed agreement that predates 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.
What is a personal guarantee?
A personal guarantee is a contractual promise by the owners that they will personally pay the debt if the company is unable to pay. Yesterday, I received a request to collect a large bill that is owed by a company that is 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 been helpful.
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. Use them to reduce debt collection costs. If you do not have a contract, get one today. You do not need a lengthy document. Even a quick email works. Update customer contracts annually. Use a personal guarantee with business customers.
In other words, close the barn door before the cows get out, not after!