In these days of a difficult economy, accounts receivable become of ever greater importance to every business. The timely receipt of money due is the lifeblood of almost any business and frequently determines whether a business can survive. Paper profitability must be evidenced by a positive cash flow. These are the times when a business is well advised to review its credit and collection policies to assure that its accounts receivable will convert to cash.
There is a truism that is oft stated by those who deal with credit and collection issues: the collectability of an account receivable is determined at the time that the account is created. The importance of an up-to-date, signed and dated credit application is imperative. Indeed, credit applications should be reviewed regularly to assure that they are current.
Equally important is knowing and confirming the legal identity of the customer...is it an individual, corporation, partnership, LLP, LLC, Trust or other legal entity? We recommend that creditors regularly review checks received from their customers to compare the name of the entity on the check to the name of the customer. Frequently customers change their legal identity without notifying their creditors. Additionally, it is recommended that creditors regularly make and retain copies of checks received in payment of an account and note the name of the bank and the account number. The information can be valuable for future use.
The creditworthiness of the party to whom credit is being extended is a major element in determining to whom credit should be extended. There are new sources from which financial information can be obtained, and there are new credit scoring techniques that can serve as tools in determining who qualifies for the extension of credit. These are times when credit granting policies should be reviewed, and if necessary, revised to be consistent with the realities of the present marketplace.
While creditworthiness is the standard, there are ways in which a business' market can be expanded by utilizing credit protections that enhance collectability and that allow for sales on other than only an unsecured basis. Those in the construction industry should be well aware of the benefits of protecting payment by filing a lien.
In other industries and in general, there are other devices that can be utilized at the time of the transaction to assure payment of accounts receivable, i.e. requiring personal or third party guarantees, taking of a security interest in the items being sold, obtaining a pledge of other collateral or requiring a bank Letter of Credit. Indeed, accepting payment by credit card is a growing practice in business-to-business transaction. There are a number of devices that enhance the collectability of an account receivable. These are the days that the availability of such alternatives should be revived and considered.
In addition to those internal devices available to a business, factoring, accounts receivable financing and credit insurance are alternatives that are available to credit grantors. Lenders are ready, willing and able to customize packages to meet the needs of their clients. Credit insurance, for example, may be purchased for all accounts or for a single account. (Indeed, shopping for credit insurance is a not so subtle way to verify the financial strength of an account or accounts.)
We have been surprised to learn that in business-to-business transactions credit card companies and credit card processors allow the use of a credit card to pay a past due account. There are advantages to accepting credit card payments, but that is for a future blog post.
When it is determined that collection activity is required to collect a delinquent account, prompt, immediate action is recommended. The applicable axiom of attorneys specializing in the collection of commercial accounts is that collectability is determined at the time the account is placed for collection. The lesson to be learned is to diligently and promptly pursue efforts to effect collection.
By: Eugene B. Berman, Esq.
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