Protect Your Business from Bad Debt

Author: Richard L. Bolhouse
Date: 09/22/2006

Newspaper headlines continue to tell us that many businesses and people in Michigan are struggling financially. With an election coming up in November, both political parties tell us that Michigan's struggling economy is the number one issue facing voters. Meanwhile, attorneys continue to be busy collecting bad debts for both businesses and individuals.
We advise our clients to make sure that their contracts and agreements with customers are as strong as possible in the event future collection becomes necessary. We also advise clients on the various steps necessary to avoid getting into bad debts, and, if they do, how to be in as strong a position as possible to effectively collect:
Make sure contracts and agreements are signed and up-to-date. Contracts which provide for some security, the payment of actual attorney fees, interest, and the ability to file lawsuits in the most convenient and efficient courts are extremely important.
Obtain a fully-completed, detailed credit application. If a customer wants you to extend them credit or wants you to "trust" them to pay the bill, they should be willing to provide you with sufficient information on a credit application in order for you to judge their creditworthiness.
Keep a ledger of contacts with the debtor and carefully note the time, date, details and substance of any conversations. Very useful information for future collection can often be obtained when a debtor is talking to you on the phone.
Make copies of all checks received from the debtor to show where they bank, should tracking assets through the bank become necessary in the future.
Use common sense. If your business is struggling, you might be more willing to extend credit to marginal customers. This can come back to haunt you if they are unable to pay their bills. While you want to stay busy and continue getting good customers, customers who will simply end up on your accounts receivable ledger and take up time and effort to collect are not the kind of customers you want.
Don't make your accounts receivable the last priority in operating your business. Having someone aggressively and promptly pursue bad debts dramatically increases the likelihood of getting paid.