This question was answered by Dan Norris of the McLane Law Firm
Q: Some of my business customers are taking longer to pay me after I invoice them for products shipped and related services. What are some things I can do to protect my company against customers who pay slowly or not at all?
A: This is a common question, especially in challenging economic times. Although short of placing a customer on COD (cash on delivery) terms there will always be some risk of collection problems, the good news is that there are a number of things your company can do to better position itself to collect accounts receivable.
The starting point is to have a good customer agreement that contemplates what happens if a customer’s payments are late and states the consequences. The customer agreement should clearly state your required payments (like “payment in full of all invoices shall be due 30 days from the date of the invoice”) and then include specific “disincentives” for a customer that chooses not to pay you.
One common disincentive is to charge the customer interest on past due amounts. As the customer’s obligation to you increases with time, the customer will have an incentive to pay you as soon as possible. Most states place a limit on interest rates that can be charged. However, the “maximum rate allowable by law” will always be enough to be painful to someone who has not paid you on time.
Your customer agreement should also state that if the customer is late with its payments, then the customer must pay your costs and expenses of collecting the amounts owed to you, including attorneys’ fees. Without this language, you may decide not to pursue collection of valuable receivables because of the costs associated with the collection. You may also charge a late penalty. The late penalty could be measured as a percentage (say 5%) of the amount past due.
If a customer with whom you want to continue to do business begins to pay late, you can require that your customer give you a security interest in the products you ship. This means that if the customer defaults on payments to you, you have the right senior to the customer’s other creditors to reclaim the goods that you sold to the customer. There are very specific requirements to such a security interest that must be followed precisely, but a good corporate attorney can help you understand what you need to do in your particular case.
The bottom line is that you want your customers to know upfront that you expect to get paid for the products and services you provide and do not take late payments lightly. There is no substitute for direct, early communication with your customers who you suspect may have difficulty paying on time. Call those customers and obtain their commitment to a payment schedule and hold them to it.
Dan Norris is an attorney in McLane’s Corporate department. He can be reached at (603) 628-1408 or [email protected].
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