Managing Delinquent Customers Before Resorting to Litigation

"Creditors have better memories than debtors." - Benjamin Franklin

Generally speaking, consumer debts are those debts that arise out of a contract made primarily for personal, family, or household purposes. While these debts can sometimes become difficult for customers to pay, they can also impact a company’s profit margin and bottom line if they are left unaddressed. It’s important for businesses to know how to manage delinquent customers and be aware of the steps they can take to recover the debts they are owed before resorting to costly litigation.

Below are some best practices for handling delinquent business customers. Note that the below practices may not all be permitted for the collection of consumer debts that are subject to the Fair Debt Collection Practices Act (FDCPA) and the Michigan Fair Debt Collection Practices Act.

1. Establish Clear Payment Terms

It’s crucial to establish clear payment terms at the outset of the business relationship. Define the terms upfront — clearly outline payment terms in contracts or agreements, including due dates, payment methods, late fees, and penalties for non-payment. You should also communicate expectations. Make sure customers understand these terms at the start of the relationship to avoid misunderstandings.

2. Invoice Promptly and Accurately

One of the best ways to manage delinquent customers is to mitigate the situation before they fail to pay. This can be done with timely invoicing. Send invoices promptly after delivering goods or services. The sooner an invoice is sent, the sooner payment can be expected.

In addition, the invoices should be detailed. Ensure invoices are clear and thorough, listing all charges, payment terms, and due dates to reduce disputes and delays.

3. Monitor Accounts Receivable

It’s essential to conduct regular reviews of accounts receivable. This can help to identify delinquent accounts early. Use aging reports to categorize debts by the number of days they are overdue, allowing for more targeted collection efforts.

4. Send Customers Reminders and Follow-Ups

In some cases, a delinquent account can be resolved with a friendly reminder. Send reminders immediately after the due date if payment has not been received. Implement and follow a structured follow-up process. Escalate from friendly reminders to more assertive collection efforts, if necessary.

5. Offer Flexible Payment Options

Offer installment payment plans or other flexible payment options to help customers manage their finances and make payments. You should also consider accepting multiple payment methods, including credit cards, ACH transfers, etc. This can make it easier for customers to pay.

6. Negotiate Settlements

Negotiating a settlement can help you recover the debt you are owed while accommodating the customer’s financial situation. Negotiation options can include the following:

• Partial payments — Be open to negotiating a reduced lump-sum payment or a partial payment arrangement if a customer is experiencing financial hardship.
• Early payment discounts — Consider offering discounts for early payments to incentivize prompt payment.
• Personal guarantees — Personal guarantees of the customer’s shareholders or members may be negotiated.
• Collateral — Mortgages or security interests in the customer’s property may be negotiated to secure payment.

It’s essential to use good negotiation strategies to increase your chances of collection. Prepare adequately and look for amicable solutions. Approach the negotiation assertively, professionally, and respectfully.

7. Charge Late Fees and Interest

An effective way to encourage timely payment is by implementing late fees and interest charges on overdue accounts. Apply these fees consistently to all delinquent accounts to avoid disputes and maintain fairness.

8. Maintain Professionalism and Empathy

Your company’s reputation matters. Always communicate professionally and respectfully, even when dealing with delinquent customers. Understand that customers may face financial difficulties and approach conversations with empathy while still seeking resolution.

9. Document All Communications

Documentation is key — and it can serve as vital evidence if you pursue litigation. Keep records and document all communications with delinquent customers, including phone calls, emails, and letters. Maintain detailed notes of conversations, agreements, and commitments made by the customer.

Document agreements with delinquent customers in writing signed by the customer as to the payments to be made to resolve the issue, including confirmation of the balance owed, interest to be charged, installment payment amounts and due dates.

10. Utilize Technology

There are various technologies that can be used to help manage delinquent customers, such as automated reminders. Use accounting software or customer relationship management (CRM) tools to send automatic reminders and follow-ups. In addition, online portals can make it more convenient for customers to view their accounts and make payments easily.

11. Know When to Escalate

It’s important to know when to escalate. Internal escalation should come first. Escalate delinquent accounts internally to a collections department or manager if initial attempts are unsuccessful. If internal escalation fails, consider third-party collections. This involves hiring a professional collections agency or attorney if the debt remains unpaid after multiple attempts. Ensure the agency is reputable and compliant with all laws.

12. Stay Compliant with Laws

Be sure to understand the necessary regulations when it comes to dealing with delinquent customers. Ensure all collection practices comply with the Fair Debt Collection Practices Act (FDCPA) and any state-specific regulations such as the Michigan Fair Debt Collection Practices Act to avoid legal issues. You should also expressly prohibit practices that could be considered harassment, such as excessive calls, threats, or false statements.

13. Consider Credit Holds

When necessary, suspend services. Consider placing a credit hold or suspending services to customers with outstanding balances in order to motivate payment. Clearly inform the customer of this policy in advance and provide a final notice before taking action.

14. Evaluate Customer Relationships

In some cases, it may be best to cut ties with the customer for the best interests of your business and its bottom line. Assess profitability — evaluate whether maintaining the relationship with a consistently delinquent customer is beneficial. Sometimes it may be best to part ways to avoid further losses. If you will be continuing the relationship, conduct a customer risk assessment: Implement a process for assessing the creditworthiness and payment history of customers before extending credit.

15. Learn from Experience

Learn from past experience and be able to identify patterns. Review delinquent accounts to identify common reasons for non-payment and adjust policies, terms, or customer screening processes accordingly. Make continuous improvement a priority. Regularly update your credit and collections policies based on past experiences and evolving best practices.

Learn More About Protecting Your Rights as a Business Owner

By following the above best practices, you can minimize the impact of delinquent accounts on your business, maintain positive customer relationships, and ensure a more consistent cash flow. To learn more about protecting your rights as a business owner and recovering the debts you are owed, it’s critical to have an experienced business attorney by your side.

With offices in East Lansing, Mt. Pleasant, Grand Rapids, and Detroit, The Gallagher Law Firm offers a wide range of professional services to business owners and entrepreneurs. To learn more about how we can assist you, contact us online, call (517) 853-1515 or email bpg@thegallagherlawfirm.com.