CREDIT AND COLLECTIONS FOR THE SMALL ENTREPRENEUR
The credit and collections process should ideally
begin contemporaneously with the start of the
relationship with the customer. When the customer
becomes a customer, notes should be made about the
customer’s circumstances in anticipation of possible
collection problems. Any great customer can suddenly
overnight fall into difficulty and became a major
The very first step taken in anticipation of
this, whether yours is a retail or business to
business company, is the credit application.
Credit applications should include a means of
obtaining the credit history of the principals of a
company even if it is a separate legal entity. Their
date of birth, social security number and references
are just as important as those of the company itself
for a number of reasons, not the least of which is
that it will tell you some indication of how
responsible they are in general.
You want to know their legal structure. Are they
a partnership, limited partnership, corporation or
what have you. Are they using a fictitious business
name. Who is the landlord? How long have they been
at the present location? Who are their suppliers?
Who are their bank references? You’d better get an
account number so it will be easier to attach them
after they stiff you. When were they incorporated?
Where? Why not find out on the application who their
major customers are? There’s a very good reason for
this I’ll soon get to.
Your own salesmen are a great source of business
intelligence. When a company is falling apart, the
visiting salesmen have clues first. They can be
prompted to tell you when to stop extending credit.
They may listen to employees grumble, bosses and
fellow salespersons complain about business and
perhaps pick up news about plant closings, layoffs,
disputes and other events which might cause you to
Credit is a marketing tool. It helps you bring in
business, but in the final analysis the business
brought in by errors in the extension of credit can
be fatal, so the last thing I would say on this is
that it is better to err on the side of caution.
Your company’s application for business credit
should include a personal guarantees section where
an individual signs to be responsible for the debt
in the event the company fails to honor the debt or
You want to know if the company owns any real
estate. You may want to quietly investigate them to
see if their equipment or inventory have any UCC
liens. You may want to hire a company like Dunn &
Bradstreet or Investigative Research in Sharon,
Massachusetts to do a background investigation
before you extend any serious credit. This is
what you do in anticipation of a problem, and in any
given company a certain percentage of customers are
going to be problem customers.
What does an entrepreneur do when things get bad
with a customer?
A customer who is 60 days late in my view is a
customer who is a problem. In my view a customer who
is 60 days late probably doesn’t care that your
bills are coming in every 30 days and that puts him
in a special category.
You can do several things as an entrepreneur with
a delinquent customer.
1. You can send letters to the folks who owe you
money. You can cut off their credit, discreetly
threaten to refer the claim to a collection attorney
or agency. Please remember that collection agencies
can do little but refer the claim to a real lawyer,
make vague threats by phone call or letter and not
much else. They are constrained from quite a few
unpleasant practices by the Federal Fair Debt
Collection Practices Act. So now professional debt
collectors, including lawyers, place a mini-Miranda
warning on their letters saying that this letter is
an attempt to collect debt. Any information obtained
will be used for that purpose. Debt collectors
cannot call at unreasonable hours, cannot threaten
suit if they don’t mean it and cannot reveal the
debt to others or threaten to do so.
For reasons of potential liability, it is a risky
practice to call a consumer debtor at work. If a
debtor requests that he not be called at work and
you continue to call there, you can face action
under the state attorney general’s regulations. If
push came to shove in such a case, every co-worker
would be available to testify how your calls caused
the debtor emotional anguish and how he/she pleaded
with you to stop calling and you didn’t listen.
Another aspect of the Fair Debt Collection
Practices Act is the requirement that a debt be
validated upon request of the debtor within 30 days.
Failure to do this can precipitate liability. I have
seen reported judgments of $1,000.00 for failure to
validate. There are risks of class actions in this
area and the requirements are in fact technical, so
if you have a collector working for you, or are a
lawyer doing collections, you must study the Federal
regulations and state regulations at Mass. 209. CMR
18 or risk getting hit with all kinds of
counterclaims and possibly class actions or even
actions by the Federal Trade Commission.
A lot of folks in business have expressed the
view that it is just not good public relations to
sue over a bad debt. I never thought that this was a
sensible policy. If people are going to take
advantage of you, you don’t want them or people who
think like them as customers, and sometimes a
lawsuit is absolutely necessary.
2. You can make phone calls to the folks who owe
you money. I would be careful to call at reasonable
hours and avoid Sundays and holidays. Do not call
before 8:00 am or after 8:00 p.m. and be extremely
polite. You must not threaten suit unless you
actually intend to bring suit
3. You can refer overdue accounts to a collection
agency, but remember that the collection agency has
limits on what it can do. They don’t sue, they don’t
attach. Collection agencies can only send letters or
make calls , and you would be surprised how many
have rude and bullying people make calls for them
who can precipitate liability for their clients.
4. You can arrange for their claims to be brought
into court by referring it to legal counsel, or
learn pro-se methods yourself.
If you are familiar with this process, then you
are likely to know what I am going to say. Strangle
the debtor by grabbing its assets before the debtor
goes out of business, before it files bankruptcy,
before your best witness dies, before the debtor
company merges and it’s a massive hassle to sue, and
certainly before the statute of limitation expires.
(6 years here in Boston, MA)
If you are legal counsel, screening cases on a
number of grounds is vital for a number of reasons,
not the least is that you want to spend your time on
Make sure you have all the elements of an
enforceable agreement prior to bringing suit.
1. Was the contract between two sober persons of
sound mind and legal age?
2. Was the contract for a lawful purpose?
3. Was there proper consideration?
4. Was there an offer and acceptance?
5. Was there performance or was there a breach or
partial performance and partial breach?
At this point, if the customer has not done what
they were supposed to do, and the answers to the
questions are yes, you mostly likely have a case.
Call the Law Offices of David Grossack now and
protect your rights!