Frequently Asked Questions

What is the most important principle for creditors in extending credit?

Knowledge is power. "Know thy customer" at the beginning of the relationship. Your customer will respect you more for your thoroughness and tenacity and likely pay you before sloppy "easy going" creditors. Do not do business on a handshake.

What is the most critical credit tool for creditors?

The signed agreement - whether it is a credit application, an account agreement, an invoice or some other writing.

What are the most important provisions in the signed agreement?

Your signed agreement - whether a credit application, a contract and or signed invoices.

What is the most critical tool in successful collections?

• A venue provision (authorizes a lawsuit in your home town)
• A late charge provision (up to 18% per annum in California)
• A limitation of liability provision (eliminates lost profit claims from commercial customers)
• An attorney fees provision

What is the first important credit step?

Get the exact legal/business name of your customer. Businesses are typically sole owners, general partnership, corporation or a limited liability company. Get the exact name of the business. Obtain the federal tax ID number of the business and social security numbers of the owners. Ask on the front end for a copy of the customer's fictitious business name and/or other paperwork showing when that business was started.

What if the customer is a new business?

Get a personal continuing guaranty of payment signed by the owner(s) of the company.

What if the customer is a sole proprietor?

Get the spouse to co-sign or guaranty payment on the account.

What if the customer is a young person starting off in business?

Get the parents or older relative to co-sign or guaranty payment on the account.

What is the second important credit step?

Call the bank and credit references on your credit application or contract. Use a credit service in conjunction with your credit application on your larger accounts. I recommend CDB Infotek (great for individuals), Dun & Bradstreet (business information report is the best) and Experian (formerly TRW) for smaller accounts. Parasec is a useful (but expensive) service to obtain corporate or limited liability documentation on your customer from every state. Additionally join your local credit and collection agency and use their credit reporting divisions for local customers. See useful links for CDB Infotek, Dun & Bradstreet, Experian and Parasec.

What is the third important credit step?

Keep a tight rein on your customers. Do not let them get more than 40 days out (if net 30). If you make a special extension, make sure that you get something in return (e.g., an acknowledgment that a specific amount is owed and/or that the customer agrees to pay all interest and attorney's fees incurred if the deadline is missed). Get a promissory note for the balance from all owners, if possible. Have an attorney send a professional but firm letter threatening the immediate filing of a lawsuit if payment is not made or a settlement negotiated.

What is the fourth important credit step?

If your attentive efforts do not get you paid, file an immediate lawsuit. Do not make or have a collection agency make a string of telephone calls. If the customer is attempting to get financing and cannot afford a lawsuit, use your leverage. The lawsuit can always later be dismissed if you are given adequate security.

Should I use a collection agency or a collection attorney in filing suit?

Always use an attorney to file suit if the principal amount exceeds $1,500.00.

1. The agency usually gets more if they settle the claim pre-litigation since they do not have to share any fees with the attorney.
2. A collection agency cannot sue on noncontractual claims such as fraud (where the customer never intended to pay the creditor), which may be present in your case, often imposes personal liability on the owner and entitles the creditor to punitive damages. The threat of suing for fraud might in some instances get the creditor paid quicker. The more aggressive creditor generally gets paid more and before the passive creditor.
3. The collection attorney can handle the matter on a hourly basis, which the agency cannot do. If the account is paid quickly after litigation and your written signed agreement has an attorney fees clause, you can get 100% of your money, which almost never happens with agencies.

Collection & Internet: Blackboard

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