For those in industries filled with chronically late payors, it can be difficult to know when the right time to send a client to collections is.
You may worry that by placing your customer in collections, you will lose the “relationship.” But if a client doesn’t pay you and uses your money to finance their business, are they a client worth keeping? (An old friend once told me that a non-paying client is a hallucination!)
In certain industries like construction, 45-day payment terms easily extend to 90, 120 days, and longer. Those who work at professional service firms, such as accountants and lawyers, may have clients who failed to pay a balance despite paying in full in the past.
So how do you know when it’s time to send your client to collections? Here are some considerations to help make the decision.
Collectability
The earlier you place a claim for collection, the better the likelihood of collecting. As debt ages, the chances of collection decline. Old debt becomes stale debt.
How collectible a claim is depends on the financial status of your client. It’s important to know how many others are pursuing your client for payment. Almost every state has public access to court records. Conducting this research will show you how many lawsuits have been filed against and by your client. A flurry of lawsuits would indicate that you are one of many not being paid.
Underlying agreements that require parties to pursue mediation or arbitration instead of litigation are not searchable, as they do not create a public record. It’s only when a party seeks to convert an arbitration award into a money judgment that a public record is created and searchable. A party must make an application in state court to collect on an arbitration award,
Uncovering Your Non-Paying Client’s Financial Condition
Unless your non-paying client is a public company, it is difficult to uncover information about the company’s fiscal health. This makes it hard to understand if their reason for non-payment is due to financial distress, willful avoidance, or both.
You can search if your client has recently taken loans and pledged assets to do so by searching the state’s database of UCC filings. A lender will ensure they take a security interest in a customer’s assets when making the loan and recording the financing statements. Anyone can view these public filings by checking the public database.
You Have a Credit and Collection Policy
Companies that have a credit policy may not extend some or any credit to a client who is already in arrears, thus alleviating the dread of deciding to maintain a non-paying client.
A collections policy dictates when and what will happen in the event of non-payment. Having both a credit policy and collection policies removes the emotional decision of when to place a client in collections.
Some industries have strict deadlines if you wish to take advantage of helpful collection tools. For example, in the construction industry, for those improving real property, the time to assert a mechanics lien is often much shorter than the time to file for mediation, arbitration, or litigation. For suppliers or service providers, the time to lien a co-op or condo in New York is 120 days from the date the work was done. The time to pursue a client for demand is indefinite, but you have four to six years to pursue mediation, arbitration, and litigation, depending on your business. On-account payments can extend the life of the debt, but for lien purposes, there are no extensions to file. If you miss the deadline, that’s it.
Considering these factors will aid you when determining when to place a client in collections. If you have any questions, please contact us at +1 (212) 686-0100 or send us an email.
