Proper credit, collections procedures maximize revenues

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Geoff W. Hetley is the president of the Hetley Law Firm, PA, in Olathe, Kan. This column is made available by The Missouri Bar as part of Law Day.|ret||ret||tab|

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With the uneven economy, many business owners are juggling their staffing and technology requirements to keep up with their clients' expectations while simultaneously having to find future sources of revenue. These time demands have forced small businesses to prioritize their administrative time. Preoccupied, many businesses do not spend sufficient time considering and implementing office procedures for credit and collections. However, attorneys with experience in this area recommend businesses take the time to develop a credit application, as it is the key to successful collection of past-due accounts.|ret||ret||tab|

Use a written credit application. Does your business use a written contract or credit application? Many times the parties will not have a written agreement or contract. Instead work is performed or services are rendered, and then an invoice is generated. But the more information obtained from your customer at the outset of the credit relationship, the greater the chances of successfully collecting should there be a default. The credit application needs to identify your customer, not just by name, but by entity, such as a sole proprietorship, partnership, corporation or company. Keep in mind customers can also use a fictitious name different than the one they are operating under. Depending on the state where your business or customer is located, this information is verified by visiting the Web site of the Kansas Secretary of State at: www.kssos.org/main.html and the Missouri Secretary of State at: www.sos.state.mo.us/BusinessEntity/soskb/csearch.asp. Don't look for fictitious name registration in Kansas, because only Missouri requires this type of registration. Also include space in the application for Social Security or tax ID numbers and for banking and vendor references.|ret||ret||tab|

Consider requesting financial statements. The use of financial statements is a business decision depending upon your particular business and the nature of your clients. For those businesses that have walk-in clients or extend credit over the telephone, it could be detrimental to request a current balance sheet and/or profit and loss statement. In these situations, the same purpose can be served many times by including in the credit application a list of references. If the amount of credit being extended were significant, then it would be prudent to request this financial information. These documents can be of assistance in determining the customer's receivables and accounts payable. Another consideration is to request an aging report to further ascertain the cash flow of the company. These would give guidance whether the prospective customer has cash flow problems or has management issues and can timely pay your invoice.|ret||ret||tab|

Consider requiring a personal guaranty. During the initial stages of the relationship a customer intends on paying his or her obligation and does not anticipate financial difficulties. Universally the parties automatically fill out the entire application, so a guaranty clause can be placed at the bottom of the application. |ret||ret||tab|

It is important to consider a guaranty for customers who are closely held corporations. First, the corporation may have little to no assets. Second, if the owners will not execute a guaranty, it may be a red flag that something is wrong with the financial condition of the corporation. |ret||ret||tab|

Since the purpose of having a guaranty is to have another party to collect from, the signatures must be in proper form. More often than not, a corporate or company guarantor will put their title next to their signature on a personal guaranty. This creates a legal issue as to whether they are signing as a corporate officer or an individual. In order to proceed with collection efforts against an individual, the signatures must be in their individual capacity.|ret||ret||tab|

Consider several "creditor friendly" clauses. One is an attorney fee provision. In order to obtain attorney fees, the credit application needs to include an attorney fee provision. In Missouri, the amount of attorney fees for consumer credit loans may not exceed 15 percent of the amount due and payable, along with court costs. Missouri law only allows attorney fees to be awarded where the contract or promissory note is referred for collection to an attorney and is not handled by a salaried employee or holder of the contract.|ret||ret||tab|

Another clause to consider is the interest rate. Often invoices state interest will accrue at "1.5 percent per month until the balance is paid in full." However, under Missouri law the maximum rate can only be 9 percent if there is no agreement as to the amount of interest to be charged. The ability to get a greater rate of interest is another reason to consider a written credit application.|ret||ret||tab|

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