Commercial Credit Management Tips for Collections

10 Tips for Commercial Credit Management of Collections

I’m excited to share some of my favorite commercial credit management tips from NCS. In this three-part series, we will review tips for Collections, UCCs, and Notices & Liens. Up first? Collections!

Tip #1: Up-to-Date Credit Apps Aid in Collection Success

Make sure you have a corporate credit policy in place to update your debtors’ credit applications annually or, at the very least, if/when they request an increase in credit. Companies are often changing names, locations, banks, officers (just to name a few) and, as their creditor, it’s critical to have accurate and current information on hand. Then, in the event your customer defaults on payment, you’ll have a reliable and up-to-date credit application to aid in your collection success!

Tip #2: 9 Documents Every Collection Should Have

Here are 9 documents you should include with any collection placement: copy of the contract or agreement, copy of the credit application, copies of invoices & a statement of account, copies of proof of delivery/bill of lading, copy of the personal guarantee, your customer’s trade references (including bank name, account number, and copies of returned/NSF checks), copies of correspondence & notes (emails, notices, demand letters, documented phone calls), copy of the corporate certificate, and copies of credit report(s).

Tip #3: Pulling a Credit Report for the Correct Entity

It’s vital to obtain the correct credit history and information for your customer. Here are a few key pieces of information that will assist you with pulling credit info on the correct company:

  • Customer’s corporate legal name
  • Customer’s address (or alternate addresses)
  • Customer’s web address
  • Contact info for officers and/or owners of the company

Tip #4: Filing a Bankruptcy Proof of Claim as a Secured Creditor

Whenever possible, creditors want to file a Proof of Claim as a secured creditor. In the event of a debtor’s bankruptcy, secured creditors are paid before unsecured creditors. Properly executing a mechanic’s lien, bond claim or UCC, grants the creditor a secured interest, which increases the likelihood of payment in the event of a bankruptcy. A creditor may also be considered secured if there is a Corporate Guarantee or Personal Guarantee in place. Remember, a creditor can have a secured & unsecured claim in the same bankruptcy.

Tip #5: Avoid Common Missteps with the Bankruptcy Proof of Claim Form

Here are three things to remember when filing a Bankruptcy Proof of Claim form:

  • Be on Time! Too often, creditors miss the bar date to file.
  • Know Your Claim! Including all amounts owed for all accounts and affiliates is a must.
  • Secured or Unsecured? That Is the Question! Know whether you are a secured creditor and file properly.

Tip #6: Benefits of Doing an Asset Search Prior to Suit

Typically, once an attorney has filed suit and obtained judgment, creditors look to asset searches to reveal banking information, properties, vehicles, etc. to attach their judgment to. However, there are creditors who run asset searches prior to placing their claims with a collection attorney. Why would they run an asset search prior to suit? Because creditors want to know if it is worth the time and money to file suit, move through litigation and obtain judgment.

An asset search can be run at any time, on an individual and/or a business. It helps to locate addresses & phone numbers and a full-service asset search includes:

  • Employment
  • Business affiliation
  • Vehicle ownership
  • Real property ownership
  • Banking relationships
  • Bankruptcies
  • Liens
  • Judgments
  • Notices of defaults
  • UCC filings

Tip #7: Consider Using a Customized Letter for Collection

Do you have accounts that are past due, but you are not ready to place them for collection? If you are looking for a less aggressive collection tool, talk to us about our flat fee, customizable letter writing series. Our team will work with you to create the perfect series for your needs. We’ve customized thousands of letters for clients over the years. We use that knowledge and experience to create the best letter for your situation.

Tip #8: Be Aware of a Customer Name and/or Structure Changes

Who is your customer? In recent years, we have seen many mergers and corporate structure changes. It is vital for creditors to be cognizant of any debtor name and/or structure changes, especially when utilizing the collection and litigation process. Suing the wrong entity could result in the court case being dismissed and affect any possible recovery.

What is a creditor to do? You could add a clause within your contract/credit application requiring debtors to notify you within 30 days of these changes and consider enrolling your customers in the NCS Corporate Monitoring Program. With the monitoring program, you will be alerted to registered entity changes reported by the Secretary of State Corporation Division.

Tip #9: Personal Guarantees are a great tool, but even better when notarized!

Most credit professionals would agree that personal guarantees (“PG”) are an effective tool used to reduce credit risk. A guarantee can create a sense of comfort with the creditor, especially when the creditor is shipping on an open account with no other security or leverage.

The personal guarantor, who is often an officer of the company, may pay closer attention to debts that are personally guaranteed to avoid personal lawsuits for collection of the debt. Frequently, the personal guarantor will instruct that those debts which are not personally guaranteed remain unpaid.

As a best practice, require the personal guarantee to be notarized to eliminate the personal guarantor’s claim of a forged signature. Also, consider filing a UCC even when a personal guarantee has been issued.

Tip #10: Four Signs Your Customer May Be in Financial Distress

Business failure is inevitable. It is imperative that you, as a creditor, protect yourself from a customer’s failure/default. Your best defense? Be proactive! Take advantage of secured transactions (UCCs and Mechanic’s Liens) and pay attention to signs of distress:

  • Change in Corporate Status: Monitor your customer’s corporate standing with the Secretary of State, as a change in corporate status is an early sign of distress. Negative changes in status could indicate the company is preparing to close.
  • Pay-When-Paid: In this case, it’s the infamous “I can’t pay you until I get paid” or “The check’s in the mail.” They may also say “We are waiting on financing from the bank. Once the bank loan goes through, we will pay you.” This is a sign of poor cash flow/lack of working capital…and it’s dangerous territory.
  • Broken Promises: This is in line with “the check’s in the mail.” These promises include promises to pay, promises to contact you with updates on payment status and promises of quicker payment if additional credit can be extended.
  • Silence: Unreturned calls, unread emails, a disconnected phone number, undeliverable mail & email are all signs of silence. And, when money is owed, silence is never a good thing. When you no longer have your customer’s cooperation or, in this case, communication, it may be time to look at hiring a third-party agency or attorney.

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