Credit and collection professionals, collection agencies and agents, attorneys and absolutely everyone in the ARM industry will tell you the same thing about aging receivables: start collection actions as soon as possible. It’s a clear fact that an overdue account becomes less collectable each day that collection efforts are postponed.
But where do you begin? How do you collect on an overdue invoice exactly? This post discusses everything you’ll need to successfully collect on overdue invoices and aging receivables.
Write Out A Collections Policy
We’ve talked about credit policies on this blog, and then even “lien policies,” which are specific to the building, construction and supply industries to contemplate how mechanics lien compliance will fit into a company’s standard credit procedures. A very important component to every credit policy is the company’s collections procedures.
Collection procedures dictate how a company will go about to collect an overdue debt. When will they make a reminder telephone call? When will they send a reminder letter? How many letters will they send, how long will they wait before going to collectors, and when will the account go to suit?
These are important things to have worked out before you are confronted with an overdue account. Put these things in writing so you and your staff have something to turn towards for guidance. Treat every account the same and you’ll get predictable results.
Know The State Collection Laws That Apply To Your Accounts
When putting your collection procedures together it is critical to understand the collection laws that apply to your account. This can be complicated if you operate in multiple states, as the collection laws will differ across state lines.
Knowing the applicable collection laws is important for two reasons:
- You’ll know what legal tools are available to help you collect; and
- You’ll know what legal pitfalls you must avoid in your collection efforts
Knowing the collection laws of a state is half the battle. The other half is knowing which state law will apply to your account. Sometimes, contracts dictate which law will apply with a choice of law provision. Other times, the state where the action is performed (i.e. where materials or labor are furnished) will have control.
Send Demand Letters or Open Account Letters
Sending a formal request for payment is a great first step in collecting an overdue invoice. There are a few reasons why.
First, the formal written request for payment will serve as a reminder to get the account paid. This is pretty critical as most debts go unpaid because people have messy or nonexistent accounting departments and they simply forget about or misplace the bill. Sending a formal request for payment will get the debt back to the top of their to-do list.
Second, and perhaps more importantly, you can use this opportunity to claim legally available remedies. This is the case frequently with “open account” laws. Under these laws you’ll have the right to collection penalties, interests, attorney fees or other charges against the non-paying party…but only if you claim them. Claiming them requires sending the correct letter. Material supply contracts almost always constitute open accounts, but construction contracts only sometimes do.
Another type of demand letter is the “notice of intent to lien.” These documents are very successful at getting people to pay as they not only serve as a reminder and demand letter, but they also warn the receiving party that a lien will be filed if payment is not made. You can file a Notice of Intent to Lien through Levelset .
File A Mechanics Lien or Bond Claim
Don’t let this tool pass you by. A mechanics lien or bond claim is without a doubt the most potent collection tool available to companies in the construction or material supply business. These claims are remarkably successful at getting companies paid even in desperate situations. Check out this article discussing 17 Ways A Mechanics Lien Works To Get Your Company Paid.
The trouble with mechanics lien or bond claims, however, is that you only have so long to file them. Therefore, know the deadline applicable to each account / project, and make sure you get your claim filed before the deadline.
Followup, Pick Up The Phone, And Then Move Forward With Collections
What comes after a mechanics lien claim or a bond claim, or after a demand letter? Followup! Most notably, pick up the telephone and call the party? Getting in touch with the party not paying the invoice is usually more successful than entering into a cold war with them, as the silence and adversarial action inherent in these types of claims usually makes the problem get worse before it gets better.
Of course, there will be situations where telephone calls, reminders, requests, letters and liens just won’t get the other party to pay. These are the minority of circumstances, but when it happens it may be time to look into hiring a collector to work on the account.
Foreclose Upon the Mechanics Lien or Bond Claim
Levelset’s service is remarkable because it is a complete turn-key accounts receivable management and mechanics lien solution. We can help your company preserve its security rights on every account and then proceed with a lien to enforce that security. We can help you collect, and if that doesn’t work, we can even arrange to have your mechanics lien claim or bond claim foreclosed upon with a lawsuit.
While these claims require foreclosure only rarely, it’s important to be ready when the situation arises.
So, how to collect on an overdue invoice? As you can see from the above, it is more of a discipline and procedure than a quick trick. But if you plot out a plan and stick to your guns, and follow these steps, you’ll see your bad debt plummet and your margins rise.
Talk to Us
If you’re having trouble getting paid on a project, we might be able to help. Let’s talk about getting you paid.