The most recent NFIB webinar focused on how to get debtors to pay what they owe to you
Businesses looking to recover from the COVID-19 crisis must be able to achieve a secure financial position, which can be undercut when there’s an overdue debt they can’t get repaid.
NFIB experts Beth Milito and Holly Wade invited lawyer Cliff Ennico who is a nationally recognized expert on the legal and financial issues facing startup and small businesses, and the author of eight books on business law and management, to go in-depth on the issue.
“A lot of good people are having trouble paying debts these days,” Ennico began. “If it ever was the case that people owing money was a moral judgment, it is not the case today. Because of the pandemic and the related government shutdowns, there are a lot of good, honest people who owe a lot of money. This is not a program for those folks, this is a program for the people to whom the money is owed: the creditors. Few things eat at your insides worse than when a client stops paying you, especially if it’s a client that has been paying you regularly and all of a sudden the payments slow down or stop.”
Ennico advises three goals when it comes to problem clients: to keep them at an absolute minimum of receivables, to keep the small receivables from becoming bigger ones, and most importantly (and most difficultly), treat problem clients “ruthlessly.”
“Whenever someone owes you money, one of the first things you have to do is get their attention. If you don’t get their attention, then it’s going to take a while for payments to happen,” says Ennico.
When it comes to collecting on a debt, Ennico advises that you not wait for them to call, instead you should take the initiative. Taking a “global” approach and treating all your debtors equally is advised, so nobody will feel like they’re being unfairly targeted.
Owners should also be aware that some debtors will reorganize their business thanks to what Ennico calls “the most fortuitous timing of any statute in American history. Congress passed the Small Business Reorganization Act of 2019, and it became effective February 2020, right before the pandemic. What it did was it created a new Title V under Chapter 11, which is an expedited Chapter 11 proceeding for small businesses. The most important thing is to be prepared for a tsunami of Title V reorganizations while small businesses try to buy time to work out all the debts they have.” Ennico also suggests getting proof of claim documents for all debts in case the debtor reorganizes.
To avoid these difficult debts, Ennico says that “an ounce of prevention is worth a pound of cure.” He suggests always getting money down up front, and to bill regularly. “Most people would rather pay a small bill every month than a huge bill once a year, so get the client into a regular paying schedule. Also, if they start having difficulties [paying these bills], you’ll be able to monitor the situation and identify the problem debtors before the amounts get too big. Remember, big receivables almost always start as small ones that get out of control.”
He also advises:
- The moment a bill goes unpaid, contact the debtor and (if necessary) stop work until they’re paid in full.
- Get an airtight contract in regards to when payment is due and, if you get a bad vibe from someone, request a credit check before lending them money.
Ennico then goes on to go into detail about how to write an airtight contract, collect on an outstanding debt, what to do if the issue ends up in court, alternate options like collection agencies, and more. After that, he answers questions from webinar attendees.