Commercial Collections Business Finance Booster Shot
Commercial collections: fixture of the new B2B culture
If you’re in the business-to-business field, or even if you’re a consumer products business that works through third-party distribution channels, you probably know what it’s like to check your mail anxiously each day, sifting through all the bills for that payment that was supposed to have been in months ago.
It wasn’t supposed to be like this. If you were a good, honest businessperson who dealt with other good, honest businesspeople, “commercial collections” wasn’t supposed to be part of your vocabulary.
Back in the good old days, an invoice or purchase order that had an established company listed in the “bill to” field was almost as good as a cashier’s check. Nowadays, if you’re in the business of serving other businesses you may find that your cash flow is less reliable than a small-time bookie’s.
Commercial Collections: A Personal Story
This past April I finally got the $2,000 a client owed me for work done in December, after spending almost as much money’s worth of my time reminding them to pay.
No, this wasn’t one of those hand-shake deals-we had a 5-page contract specifying net-30 payment terms. Nor was this some guy with a lemonade stand. It was the media division of one of the largest retailers in the United States.
The worst part was, I trusted this client based on my experience working with them a few years before. I actually spent the money on Christmas presents, fully expecting the payment to come in before my credit card statement.
Avoiding Outstanding Invoices
Of course, you can nip this problem in the bud by cultivating strong relationships with clients who pay on time. But those clients are getting few and far between-and, as I found, the good can go pretty bad pretty fast.
Worse, it seems that the larger the business, the less likely they are to pay on time. “Net 10 days” might as well be a foreign language in Fortune 500 land. The long-standing advice given to B2B businesses and self-employed people is that the money is in big corporations. But good luck getting it from them before your rent is due.
What I Should Have Done
Looking back on my experience with the deadbeat corporate client, my biggest mistake was doing it all myself, with writing the letters and making the phone calls. With an hourly rate of about $75, I ended up spending the time equivalent of a large chunk of my $2000 fee.
I should have gone to a collection agency. I just didn’t know then that were collection agencies that would take on small business debts and run the whole process for you for as little as $20 per debt.
Of course, I also didn’t know that going to a collection agency didn’t necessarily mean “putting an account in collections.” Many collection agencies are in fact refashioning themselves as “accounts receivable management” specialists; they’ll even manage your invoicing from end-to-end if you want. The client may not even realizing that the person on the phone is from an outside agency and not your own personal assistant.
When I think of all the value of the time I spent collecting that last $2,000, I could kick myself for not handing it over to a collection agency. But, I can always look forward to putting this knowledge into practice the next time I have a client who’s slow in paying.
Steve Austin is a regular contributor to Let No Debt Remain Outstanding (http://www.let-no-debt-remain-outstanding.com/), a website with articles on choosing a collection agency, along with recommended the best collection agencies.
Learn About Commercial Collections Agencies Fees
As with any other service, there are good and bad commercial collection agencies. Beware of any agency that offers you cut rate commissions far below the accepted Commercial Law League rates, offers you kickbacks on commissions, or makes outlandish promises about recovery success.
You should investigate, evaluate and rate the commercial collection agencies that you plan to use just as carefully as you do with customers when you grant credit. Here are some suggestions:
Use Commercial Collection Agencies That Specialize In Commercial Collections
If you consider a nationally known commercial collection agency or network, ask for references within your industry. Call these references to see how satisfied they are with the agencies success rate, and how quickly they remit the funds collected.
If you consider a local commercial collection agency, in addition to checking references, also ask for financial information and the name of their bonding insurer. Check with the insurer to confirm coverage and claim experience.
Check with other credit professionals in your own industry to see what commercial collection agencies they use. Many commercial collection agencies specialize in a particular industry. This can be an advantage because these agencies usually know the debtors, and are familiar with the industry conditions. Many of these agencies also provide adjustment bureau services, where they will provide space, secretarial services, and perhaps even legal counsel for debtors and creditors to attempt out of court settlements.
Using A Commercial Collections Agency
When you turn an account over for collection, make sure you give the commercial collection agency a complete package. This should include:
A Statement Of All Charges
Copies of purchase orders, invoices, proofs of delivery, contracts, etc.
Photocopies of customer’s checks for any partial payments.
Any correspondence sent or received on any of the outstanding items together with any claims of shortages, non-conforming goods, breakage, or returns.
If you have personal or corporate guarantees and/or any security agreements, include copies of these, along with copies of any UCC forms showing the dates filed.
The more back-up detail the agency has, the better it can work for you. If the matter has to go to suit, you would have to provide this information anyway, so you might as well do it at the beginning of the process. If any paperwork is missing, it gives you time to locate it.
Unless there is a good reason for you to become involved (i.e., a return of merchandise or a valid claim which reduces the amount owing, and you issue a credit memo) do not interfere with the process between your customer and the agency. You hired the agency, so let them do their job. Many times a customer will contact you, and try to make a deal so they won’t have to pay collection charges or have their reputation tarnished. The customer may also threaten you with a counter-suit because of a product problem or state that if you press the claim, they will never again do business with you. Stand firm, however, if they do threaten suit, let the collection agency and your own legal department know about it.
Before you place a claim with an agency, you should have determined whether you plan to eventually press for suit and judgment if the agency cannot collect amicably. You do not necessarily have to let the agency know of your decision at this stage, but you should have a plan of action in place.
Dealing With Agencies & Attorneys: Fundamental Terms And Principles
Commercial Collection Agencies Fees
The fees charged for the collection of claims may differ from agency to agency. There are also various types of fee arrangements that may be established.
A “commission” is the compensation payable by a creditor and earned by a receiver for services rendered in effecting collection of a commercial claim. It is normally contingent and computed as a percentage of the sum collected.
A “retainer” is a sum of money paid in advance to retain the services of an attorney and should be taken into account in determining the ultimate fee to be charged for services rendered and results obtained.
A “suit fee” is a fee payable to the receiver, in addition to the commission, for legal services rendered by the receiver for you, involving court action concerning the prosecution of a commercial claim. The “suit fee” is intended to apply to the handling of the litigation, including post-judgment proceedings.
Defense of a counterclaim is considered a separate action, generally handled under a separate fee arrangement. The authorization for suit does not necessarily imply the authorization to defend a counterclaim. A specific authorization and fee arrangement should be discussed at the first hint of a counterclaim.
The amount of the suit fee is a matter of contract between the receiver and the creditor, as is the question of whether the suit fee is to be contingent or non-contingent, or partly contingent and partly non-contingent. A suit fee, if earned, is payable in addition to commissions. It belongs exclusively to the receiver unless there is a division of service and responsibility between the receiver and an attorney forwarder. The suit fee agreement preferably should be entered into before suit is commenced, and the fee should be commensurate with the services rendered, the amount involved, and the results accomplished.
“Court costs” include, but are not limited to: sums required to be deposited for filing an action, fees paid for the service of process and witness fees. You as the client, should first approve other out-of-pocket costs before they are expended. Unless otherwise agreed by you, telephone calls, skip-tracing investigation, postage and expenses for the duplication of material are considered normal office operating expenses absorbed by the receiving attorney. At no time should a receiving attorney incur unusual out-of-pocket expenses without the creditor’s approval.
Claims
Agencies deal with the collection or settlement of claims asserted by one individual or business entity against another. There are two types of claims. A “commercial claim” is an obligation incurred during the course of conducting a business which arises from goods sold or leased, services rendered, or monies loaned for use in the conduct of a business or profession. A “retail” or “consumer claim” is an obligation incurred primarily for a personal, family or household purpose.
Not all commercial accounts are based on open account balances; some claims may be based on lease agreements, security agreements, consignment transactions, guarantees or on almost limitless variations of similar business transactions. It is necessary that the agency be familiar with the available legal means of effecting collection of such specialized types of claims. This requires specialized knowledge of creditors’ rights with respect to perfecting a lien, enforcing a security interest, as well as effecting collection.
Forwarders/Receivers
A “forwarder” is the agent of the creditor who refers claims to attorneys for collection. A forwarder may be an attorney, a commercial collection agency, or a credit insurance company that acts on behalf of the creditor in the referral of claims for collection. The attorney who receives the claim is a “receiver”.
Claims emanating from a forwarder are usually forwarded to an attorney because the debtor is outside of the forwarder’s jurisdiction and the forwarder has been unable to obtain payment. Forwarding is approved by the prior express authorization of the creditor-client for whom the forwarder serves as agent. Thereafter, you, the creditor becomes the client of the attorney. The forwarder, however, continues as agent, to facilitate the handling of the claim between the receiving attorney and the creditor. Because forwarders have certain expertise and are relied upon by the creditors, it is the usual practice that all correspondence and contact by the attorney with the creditor be through the forwarder.
Get free information and advice on commercial collections.
Wealth Secrets of Millionaires How To Become Wealthy By Not Repaying Your Debt
Wealth. Does that sound like a foreign word to you? If you’re saddled with loads of consumer debt the way so many Americans are, it is probably a very unfamiliar word. Commercial and consumer debts are the greatest barriers to wealth. And when you’re suffocated by thousands of dollars of debt, it may seem impossible to get out.
There’s good news! It’s not impossible to eliminate your debt and move toward wealth. Most people and small businesses simply don’t have a system for paying off their debt, and as a result they perpetuate bad habits and remain stuck in it. By using the proper debt management system, you can get out of debt quicker than you probably imagined with minimal change to your existing lifestyle.
To top it off, there is a system you can use that will allow you to simultaneously create and feed the Wealth Cycle, a cycle of wealth millionaires use to consistently and exponentially build their wealth. In other words, you can simultaneously become wealthy and repay your debt.
Skeptical? You bet. But, you’ll be surprised at how easy this is.
So what’s the best way to abolish consumer debt? Many financial advisors will tell you to scrimp, save and cut back on absolutely everything that makes life fun. They’ll tell you to create a very tight budget and then pay off your debt before you can even think about making investments of any type.
Sounds a lot like a diet, one that will cause you to starve yourself and your children, depriving them of wealth.
So what does work?
To tackle consumer debt, Loral’s five-step debt strategy includes the following steps (explained in considerable detail in her book, The Millionaire Maker):
- Create a debt elimination box
- Calculate a factoring number
- Make a priority payoff box
- Use a “jump start allocation”
- Make your debt payments
By using this system, your debt payments start to build as you pay of your creditors, all of whom have been listed in order of priority. Your capacity to pay off your debt accelerates quicker and it does require you to shave down unnecessary expenses, but not cut out everything you love. In short, it’s realistic – and mighty effective. You simply have to commit to it.
But wait, there’s more to it!
Earlier I mentioned that you can pay off your debt and at the same time actively build your wealth. Remember that Wealth Cycle mentioned earlier? This is where it comes in.
The Wealth Cycle™ used by millionaires consists of 12 steps:
- Gap Analysis
- Financial Baseline
- Freedom Day
- Debt Management
- Entities
- Cash Machine
- Wealth Account
- Forecasting
- Assets
- Leadership
- Teamwork
- Conditioning
It’s okay if you don’t know what each step means right now. The main thing to understand is that the key to success in using the Wealth Cycle™ is knowing which steps to take, and in what order.
Everyone’s financial situation will require its own order of sequencing. A wealth mentor can help you determine what’s right for you. For some people, the first step is to develop the proper legal entities for their business and investments so as to maximize tax strategies. For others it may mean first reallocating assets so you can bring in increased monthly income that enables you to start investing. This will in turn bring in passive income which will allow you to pay off your debt quicker.
Here’s an example of when entity structuring might be used first:
Let’s say you have a graphic design business but it’s not incorporated. This means your debt includes a lot of expenses – cell phone, office supplies, postage, etc – that you paid for out of your personal account. If you make your design business an entity, let’s say a “Subchapter S Corporation”, then the portion of your debt that includes those items can now be transferred over as business expenses. Now you can write off that portion of your debt against your income, giving you
more money at the end of the year!
The interesting thing about the Wealth Cycle is, as stated above, that you only focus on debt management after you develop a Cash Machine, the proper Entities, and engage in
forecasting.
Building wealth from a position of great debt takes courage, discipline, and positive energy. I realize this may seem a difficult scenario from which to create wealth, but my hundreds of successful clients prove that getting out of debt and building wealth is very doable. What it takes is a commitment to gaining awareness of your psychology, your finances, and a willingness to let go of old habits that no longer serve you.
Loral Langemeier is the author of The Millionaire Maker. For more information on uncommon wealth buidling strategies visit http://www.liveoutloud.com.