As we’re writing this, the longest ever U.S. Federal Government shutdown just ended, albeit perhaps only temporarily. Whatever your political views, there are clearly economic costs to both businesses and individuals. Some of those costs are far reaching. Even if none of your clients are federal employees or agencies, you may still feel the burn of the shutdown. Your clients may be waiting on payments from government agencies or grants, or their clients may be waiting on those payments and eventually, those delayed payments may affect your clients’ ability to pay you. While a long federal shutdown is a rare and very public example, temporary payment problems are not at all unusual in the business world. Knowing how to recognize the difference between a client in temporary trouble, and one whose business is failing, is an important skill. So too is knowing the difference between how to handle these two different kinds of late accounts.
The first step in any new client relationship is to have the client fill out a clear and thorough credit application. The credit application should include contact information for all principals, as well as the people you will be working with on a regular basis. Using this contact information to talk to your client is your first step in determining what kind of credit problem your client is experiencing. If you determine that the payment problem is temporary and can be quickly resolved, you may wish to extend more credit at a higher interest rate. Or, depending on your own cash flow, and the relationship with the client, you may simply wish to wait out the problem. If you do decide to raise your interest rates, make sure to check with legal counsel as different states have different laws about how much interest is legal to charge.
Loyal clients can be hard to find, and being willing to work with a client in temporary trouble may pay off for you in the long run. Sadly, temporary problems can become permanent. Many businesses, especially those already on the financial edge, never recover from temporary setbacks due to natural disasters or other unforeseen circumstances. You don’t want your company to also become a casualty, so it is important to keep a close eye on any business touched by what seems to be a temporary issue.
If there are warning signs that your client’s business is in more trouble than the current situation would explain, you’ll want to act quickly to collect money owed. The longer an account is past due, the less likely it is to be paid. If your client winds up declaring bankruptcy or going out of business it will be even harder for you to get paid.
During the recent partial shutdown, the U.S. Trustee program, which handles cases filed under federal bankruptcy laws, was working at only about a third of its normal capacity. If the Federal Government shuts down again, this reduction in capacity could recur. Many civil and federal courts were already operating with a backlog before the shutdown and the longer the shutdown, the worse the backlog may get. This will affect any business attempting to declare bankruptcy, obtain a judgment against another company, or even conduct a routine legal filing. Given that a collection agency is more efficient than pursuing debt on your own, and that it may take longer than usual to take a client to court, now more than ever working with a collection agent may be in your best interest.
At The Kaplan Group we know that financial problems can happen to companies of all sizes in all industries. Treating your clients with respect, patience and understanding is always the right choice. Whether you think a client’s problems are permanent or temporary, we’re here to help.