Warning Signs That Your Client Is Going Out Of Business
Wilson Cole, President of Adams, Evens, & Ross (AER) is joined by AER General Counsel Samantha Cole to talk about knowing when to take action on possible past due collections.
The phases a company goes through when facing a financial storm is similar to the phases of a real-life storm like a hurricane. One of the key topics of this webinar is how to forecast and prepare for storms. It is essential to prepare for a storm ahead of time because by the time a storm hits, if you’re not prepared, it may be too late. Samantha says the best way to prepare is to have all documentation for your accounts in one place and accessible. You do not want to be the company that raises an unpaid invoice to a collections agency but doesn’t have any documentation showing the invoice was sent to/received by the debtor, any documentation of the work actually being done, or doesn’t even have the original contract. Having the documents accessible may be more difficult than it seems given how companies sometimes change their filing systems or vendors for record-keeping. It helps to do a periodic audit to make sure everything is in the current system and organized so that there aren’t piles of invoices that aren’t paid because they were in an old system or not labeled correctly, etc.
To continue the storm analogy, a “tropical storm” is when a client/debtor is running about 7-10 days past due. You still have about a 97% chance of getting paid and hopefully, this situation is just temporary. To be proactive, it doesn’t hurt to get out the paperwork for the client’s credit application and re-run the check to see how the client is paying other vendors. If the client is running behind on payments to multiple other vendors, especially if they are running behind more than 30-60 days, it would be a good idea to act fast. Though as Samantha points out, to “act fast” does not mean to start discounting your invoice/fee.
A “category 1 storm” is when a client/debtor is beyond 30 days past due. The chance of getting paid the full amount of your invoice drops to 84%. Staffing and recruiting firms are typically the first on the chopping block of who gets paid and who does not in this situation because they are typically considered secondary suppliers; the debt being second (or third) tier debt. A good estimate of how high your debt tier is would be to look at the type of employees you provide and the type of company it is. For example, if you provide software developers to a software company, those would be fairly essential, so the debt would be rated higher. But if you provide administrative staff or other non-essential staff, the debt would be rated lower. Samantha notes that another red flag that bad things are on the horizon is if you’ve already placed a candidate with the client company and they have not paid the candidate.
The “category 2 storm” is when the unpaid debt has lapsed around 45-60 days. Other creditors have begun placing holds on the credit line to the debtor company and the chances of receiving full payment on unpaid debt drops to around 75%. If you hear rumors from other people within the debtor company that things are not going well but credit reports say everything is fine, Wilson says to trust the people on the inside more because the information will probably be more current. The information from credit reports is delayed about 60-90 days. Wilson recommends that somewhere between the “category 1 storm” and this one is when you should escalate the unpaid debt to a collections agency or at the very least get your attorney involved if you want to get paid.
The “category 3 storm” is when the client/debtor has not paid beyond 60 days of when they were supposed to pay, credit falls so low they cannot borrow more money to fulfill financial obligations, employees start leaving and checks start bouncing. There is still a 71% that the debt will be paid in full but by this point it’s going to take some extra work. That is why Wilson says this is the situation where the lawsuits start popping up by creditors trying to force the debtors to pay. He does not believe that is the best way to get paid though because of how long it takes a creditor to get a judgment (assuming they get it at all) via the legal system; typically 10-12 months. He says in the meantime, companies still have money coming in to a certain extent and if the unpaid debt is raised to collections instead then the process can result in most or all of the debt being paid. By filing a lawsuit, even if the creditor receives a judgement in 10-12 months, it is likely that the debtor company will be out of business by then, which makes the judgement worthless and which means the creditor receives zero of the unpaid debt. Wilson recounts a story where this exact thing happened and the creditor thanked Wilson for his advice and assistance in recovering all of the debt before the debtor went out of business within the 12-month window. Unlike the previous “category 2 storm” where you should escalate the debt to a collections agency, this situation is where you must escalate if you want to get paid. Samantha adds another problem with the lawsuit route at this point; it has to stop as soon as the company files for bankruptcy.
You know you are facing a “category 4 storm” when the debt is more than 90 days past due, the client is experiencing mass layoffs, and there is only a 48% chance of getting paid. Escalating the debt for collections at this point will mean that the collections agency can attempt an accelerated collections process for a week or 2, but beyond that a lawsuit will probably need to be filed because that is the only option left. Samantha recalls that some debtor clients in this situation will resort to drastic measures, such as moving offices, to survive.
“Category 5 storms” are the worst and signify a client company is literally not in existence anymore. Bankruptcy has already been filed, the company was sold, the company was liquidated, or all of the above. There is only a .37% chance you will get paid at this stage. Wilson says that even if you know where the owner or officer of the defunct company lives, or where the new company is located if they started a new one, that does not matter much. The only thing that would matter is if you previously got the owner or company officer of the now-defunct company to sign a personal guarantee. A new company would be a separate legal entity and not responsible for the debts of the defunct company, even if the owner is the same. Samantha says there are some rare legal maneuvers that you can attempt, but they are not likely to work.
So what can you do to safeguard yourself from all of these financial storms? Unlimited free credit reports from AER can help you stay ahead of the curve. Lastly, Samantha says to keep an eye out for the checks coming from a client company to see if the bank is the same. If they’re from a different bank it could be an indicator that the client company changed banks for not-so-good reasons. For more information, send an email to Wilson@aercollections.com or Samantha@aercollections.com, or call 800-452-5287, ext 6578.
Keeping your documentation organized and accessible is very important. You do not want to be the company that raises an unpaid invoice to a collections agency but doesn’t have any documentation showing the invoice was sent to/received by the debtor, any documentation of the work being done, or doesn’t even have the original contract.
Wilson recommends that somewhere between the “category 1 storm” and the “category 2 storm” is when you should escalate the unpaid debt to a collections agency or at the very least get your attorney involved if you want to get paid.