By: Albert McLean
I’ve been handling commercial collections for companies in the Memphis, Tennessee area for over 30 years and I have developed the following system for companies who would like to improve their collections. The following tips are absolutely effective in maximizing collections for companies who follow them. At the outset, I should state that these tips (practices) are designed for improving collections in commercial transactions, as opposed to consumer transactions (although they would also be applicable to consumer transactions with some modifications).
SIGNED CONTRACT DOCUMENTS THAT ARE ESSENTIAL
I cannot overemphasize how important it is to have signed contract documents with your customers. These documents should include in all instances (1) a credit application and operating agreement signed by your customer and (2) an individual personal guaranty signed by one or more of the principals of your customer’s business. Linked for your consideration and use (and modification to include your company name and logo), are a Credit Application and Operating Agreement form and an Individual Personal Guaranty form, which I have developed based on my practice and handling of commercial collections over the past 30 plus years.
Important pieces of the linked Credit Application and Operating Agreement form are the following:
1. It requires the name of your customer (corporate name), its tax I.D. number, and the names, Social Security numbers, and home addresses of its principals, all of which are important in identifying the entity you are extending credit to, and the name of the entity to be included in a suit in the event of legal action;
2. It includes an authorization to obtain individual and business credit investigations, which are needed for measuring risk and determining the amount of credit to be extended;
3. It includes a provision for recovery of attorney fees and expenses in the collection of the debt, which otherwise would not be recoverable;
4. It includes a forum selection clause, which allows you to bring legal action in the courts in your locality, which might not otherwise be allowed;
5. It includes a provision for services charges, which otherwise might not be recoverable; and
6. It includes a signature line for not only the applicant but also a signature line for a witness, which assists greatly in obtaining an agreement that is binding on your customer (and greatly reduces the incidence of a customer’s assertion in a lawsuit, that the signature is not genuine).
Similarly, the Individual Personal Guaranty form contains important provisions including (1) a requirement for the guarantor’s full name and Social Security number (which is tremendously helpful in locating the individual if his business goes “belly up”), (2) provisions for recovery of attorney fees, services charges, and filing suit in your jurisdiction, and (3) signature lines for the guarantor and a witness. (Note: if you are doing business with a customer located in Kentucky, you will need to state in the guaranty (a) the maximum indebtedness guaranteed and (b) a date for termination of the guaranty [as shown on the form]) in order to have a valid and enforceable guaranty by a citizen of Kentucky.
A Credit Application and Operating Agreement and an Individual Personal Guaranty such as the linked forms should be obtained by you, or your credit department, from all commercial customers prior to doing business with them, and for those customers with whom the business has already been established, such documents should be obtained from them as well in order to update their information and obtain current contract documents in the event collection activity is needed.
There may be other credit documents you will want to obtain from some customers depending on the nature and size of the account, such as a security agreement and financing statement to secure your receivable or a letter of credit to cover some or all of the line of credit extended, but at a minimum, you should routinely require a signed Credit Application and Operating Agreement and a signed Individual Personal Guaranty.
In addition to obtaining the foregoing contract documents, it is critical to implement a system that requires prompt follow-up for receivables by your bookkeeping or credit department at designated intervals, e.g., 30 days past due, 60 days past due, 90 days past due, and 120 days past due, at which point either a mutually agreeable payment plan should be in place or the account should be placed for collection with your favorite attorney or collection agency. Otherwise, your receivables will become less and less collectible over time as other creditors get in line ahead of you in the collection process.
If you have been unable to collect a receivable, and the amount is sufficiently large to justify legal action, you should pursue legal action promptly. Having a signed Credit Application and Operating Agreement with a forum selection clause will allow you to pursue legal action against your customer in the courts in your locality, which gives you a tremendous advantage in obtaining a timely, often unopposed, court judgment.
Having a personal guarantee as a basis to pursue your claim against one or more of the individual principals of your customer’s business gives you a tremendous advantage in collecting your claim, as there are a large number of businesses who do not obtain personal guarantees for their accounts, leaving them no recourse in the event a customer goes out of business.
Should you have to enforce the judgment you obtain locally, in another jurisdiction, forum selection clauses in agreements pertaining to commercial transactions such as the clause included in the linked forms, have been recognized as valid by most courts nationwide, and in most other countries.
The bottom line is that if you (1) have a signed Credit Application And Operating Agreement and a signed Individual Personal Guaranty from your customers, (2) systematically and timely follow up on the collection of your receivables, and (3) initiate prompt legal action against a customer who fails or refuses to pay, you will absolutely maximize your collections, minimize your write-offs, and significantly improve your bottom line.
Albert McLean is a trial lawyer and advisor to business and insurance clients in the Memphis, Tennessee office. His practice is concentrated on civil litigation in the following areas: insurance defense, business and commercial litigation, premises liability, construction, workers’ compensation, medical malpractice, commercial collections, and probate. Learn more about Tennessee’s courts and laws.
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