How to Get More Leverage for your Company if your Customer Goes Delinquentposted on 2014-08-05 by Dean Kaplan
All too often, commercial debt collection becomes a negotiation. When negotiations begin, the stronger our client’s position is, the better these negotiations will go. The ultimate deal struck could be a larger dollar amount collected, payments collected more quickly, avoiding going to court, or if necessary, the final outcome in court and the resultant judgment collection process.
We are often amazed to find that our new clients often have boilerplate deficiencies which weaken their negotiation positions and cost them money in the long-run. One boilerplate omission that we often see is no provision holding the customer liable for collection fees. Below is an excerpt from our free ebook: the Terms and Conditions Handbook which discusses over 70 items which should be considered for governing the vendor/customer relationship:
“In the USA, typically, you will not have the legal right to recover collection costs or attorney fees unless there is a signed written agreement with this provision. Just having this provision on your invoices is not necessarily enough. You want to have a document signed by your customer indicating they agree to this provision and the Application is typically the best document to memorialize this term. You want to specifically include collection costs so that collection agencies can add this fee into the amount they are trying to recover on a pre-litigation basis, as they cannot add “potential” attorney fees at this stage. Whether or not you actually collect these costs, it gives you and your agents much more leverage during collection agency, litigation, and judgment collection activities.
In the event that Vendor commences any action to collect delinquent invoices, Applicant agrees to pay collection expenses and attorney fees, whether or not suit is filed.
We see the following version less frequently, but it has the advantage of spelling out the liquidated damages in the event of default. Some courts use a schedule to determine the fee to be awarded to attorneys for getting a judgment. This fee typically is substantially less than the contingency or hourly fee paid to the attorney. By having an agreed attorney cost in the executed Application, the Vendor has a much better chance of being awarded the full attorney cost, thereby offsetting the cost of having to litigate to get paid. It also helps at the collection agency stage, and gives in house collectors more leverage during the threat to send to collections:
We further agree to pay a 25% collection charge, in the event of default, if the account is placed with an attorney or bonded collection agency.”
When we are collecting on a $25,000 claim, adding our collection fee of 20% (i.e., $5,000) to the delinquent amount means that we can begin negotiating from a starting point of $30,000 (more if interest and/or late fees are also included in the provision). By starting at a higher dollar amount due, this gives us a stronger negotiating position with the customer regardless of what the customer is negotiating for, for example a discount or more time to complete the payments.
When the customer realizes that the collection fees will be added to the amount due, this often encourages the customer to give the debt owed a higher place on the payment priority list. In fact, this by itself can help us get a resolution while the debtor then pushes other debts back or ignores them entirely.
Any time we are able to collect collection fees our client is financially better off. Our clients frequently choose to waive the collection fee as a way to motivate the customer to immediately pay what is due. This is a far better option for many of our clients than going to court and often it incentivizes the debtor to pay off our client’s past due invoices instead of paying what is owed to other vendors.
This collection fee provision can also give in-house collectors better leverage with past due customers. Phone calls and final demand letters sent to delinquent customers can remind them that if the claim is turned over to collections, they will be responsible for the significant collection costs. This provision may motivate debtors to become current to avoid collections even when all previous collection attempts have failed.
Surprisingly, of the 22 terms and conditions examples included in our free ebook, only one included a provision for collection fees, and only six included a provision for attorney fees. These omissions definitely represent missed opportunities for our clients.
For companies that use credit applications, the collection fee provision may be included in this document, as described in our free ebook: the Credit Application Handbook. For companies that do not use credit applications, this provision should be included in your terms and conditions which should also be referred to in the sales and insertion orders or other contract to be signed by the customer.