Extending credit to the right customers.

Posted about 1 year ago. Applies to Florida, 0 helpful votes

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This is my article that was recently published in Jacksonville Advantage Magazine ( http://www.bluetoad.com/publication/?i=136938).

If you are a business owner, I would suggest you check it out, to make sure you are aware of the trap of treating all customers, as though they are always right, even if they don't pay their bill.

Here is the text of the article:

Many times, clients come to me wondering why their customers did not pay and what went wrong in their screening process. For businesses providing goods or services on credit, it is essential that their receivables are up to date and the customer information is current. Small business owners fall into the trap of being the good guy and adhering to the theory of the “customer is always right", allowing them to skip the steps necessary to protect the business. I want to share some of the mistakes that my clients have made and hope that you can learn from them to safeguard your business.

First, when a potential customer comes through the door, and I am talking about a business customer, such as corporation, before you do business with them, make sure they sign a contract or a credit application. If you will allow them to pay on credit, make sure you have all of the information you need to protect your business. Much like applying for a credit card, you want all of their information. Most importantly, you want to make sure they will pay you back. As a business practice, the motto of “the customer is always right" can be damaging at the beginning of the relationship if you go along with the new customer’s refusal to give you what you need to protect yourself.

When gathering the necessary information about a potential business customer, the basics are obvious: exact name of the company, officers, address, phone numbers and credit references. Why exact? If you end up suing them, you know exactly who to name in the suit - not what they call themselves or their fictitious name, but the legal name of the company. If they do have a fictitious name, get that too. Once you gather this information, verify it on sunbiz.org. It is critical for you to know exactly who you are dealing with in order to check someone’s credit worthiness.

Some less common but very important pieces of information that you will need to extend credit or even decide if you want to do business with that company are: length of time in business, corporate structure of the company (is it an LLC, an LLP, an Inc.?), FEIN number (do they even have one?), parent company if any, and banking information.

Let’s go back to sunbiz.org, a website that I would highly recommend to every business as a tool to check the credibility of a potential business customer. You can use this free tool to verify the name of the corporation or other entity, its officers and years in business. You may discover things that do not add up. For example, you may discover that the officers previously let the company dissolve and then reinstated it, or they have not filed the annual report for the year so the company was administratively dissolved. These can be early warning signs.

The length of time in business is also very indicative of the stability of the business. If corporation ABC has been in business for the last 5 years, it tells me that at least at a first glance, they are more stable than someone who incorporated 2 weeks ago or 1 year ago. It’s also a good idea to search sunbiz.org by officer’s name to see if they recently owned a company with a very similar name that was dissolved and they decided to start over. What does that mean? In most cases, it means that the other company was not successful and the owner decided to start over, leaving the debts and liabilities behind. It is also important to know exactly what corporate entity you are dealing with, if any, since different consequences apply to corporations, LLCs and partnerships, both in terms of liability and in terms of judgment collection.

When it comes to contracts, make sure you have one drafted by a lawyer, or at the very least, have it reviewed by one. The worst scenario is when you could have protected yourself upfront and did not because you thought you would never end up in court. Please remember this happens to a lot of people. Don’t be one of them. Protect your business.

I want to point out some very basic ideas about contracts and credit applications to keep in mind. First, if you sue someone on the contract or credit application, in order to recover attorney’s fees, they must be provided for in the contract or the credit application. This holds true with interest on the collection amount as well. If you just say “interest" in general, or don’t touch on this subject at all, the interest rate is statutory based on Florida Statute 55.03, which changes every year. However, you can include a provision for 18% interest per year or 1 ½% per month to ensure you get the amount of interest you desire.

The best way to improve your chances of collection is to ask for a personal guarantee. It lets the other party know that you mean business. This puts their personal assets at risk, which means they will take the commitment to pay much more seriously.

*These are just some basic ideas and they do not constitute legal advice.

Additional Resources

Extending Credit to the Right Customers

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