Hope for The Best, But Prepare for The Worst: Simple Common Sense Steps To Prepare Your Small Business In Case Of Client Non-Payment
In the world of business, the first step, and the biggest step, is often obtaining new business from a new or existing customer. In order to obtain new business, we want the customer to feel welcome and comfortable in the business relationship. The last thing you want to tell the customer is that you do not trust him and you are afraid that he will not pay your bill. But, especially in today’s struggling economy, customers are often not paying their bills. Even longtime customers are, for the first time, defaulting on their payment obligations.
There are several simple common sense steps that all businesses can take to prepare themselves for customer defaults, without your customer’s knowledge and without having an impact on your relationship with the customer. These steps should not substitute for the obtaining of guarantees, UCC liens or other forms of security that may be commonly utilized in your specific field, but when taken will enhance the effectiveness of those methods. These simple steps apply to all businesses, from landlords to service providers to suppliers:
- Make A Copy Of The Customer’s Check: Prior to depositing the check, simply make a copy and/or scan of your customer’s check and keep it in a clearly labeled folder or file. As your customer may have more than one bank account, or may change banks over time, you may want to make a copy of every check, or at least make it a practice to copy checks every few months. Copying of checks is important for two reasons:
- First, when you are faced with filing a suit against a customer you want to be in the best possible position to collect the monies owed to you if and when your suit is successful and you obtain a judgment against your customer. One of the most effective ways to collect upon a judgment and receive payment is by taking the legal steps necessary to have the Sherriff’s Office execute on the bank account(s) of your customer and freeze the monies owed to you. In order to undertake this process, known as an attachment or bank levy, you will need to know the bank account information of your customer. The easiest and most cost effective way of obtaining your client’s bank account information is by simply having a copy of his/her check.
- Second, when filing a suit against your customer, you want to be sure you are suing the correct person or entity. While the individual representatives of a customer may remain the same over time, and even though the business location may remain the same, it does not mean the owners or legal entity operating the business remains the same. Over time, businesses change owners, names and legal structures for a variety of reasons. The changes are often reflected in the name of the business, i.e. the name changes from Bob’s Bait & Tackle, to Bob & Son’s Bait and Tackle. Changes in names and addresses are often reflected on the checks utilized by customers.
- Keep Copies Of Current Letterhead/Emails From Customers: As set forth above, the names of businesses and their addresses change over time, and when commencing suit against a customer, you need to have the correct name and address of the customer. A very efficient and cost effective way to do this is by being able to refer to recent communications from your client that contains this information, such as e-mails, faxes and correspondence.
- Check Customers’ Websites/Search the Internet: One of the first places a customer may announce its new address and name change is on its own website. Simply by visiting a client’s web-site every so often may keep you apprised of any changes to its name, ownership and address. Please keep in mind that businesses often do not timely update their websites, especially those in financial trouble. Therefore, we would not recommend relying solely upon the information contained in a customer website.
- Judgment Searches: If you are considering doing business with a client that involves a transaction or cumulative transactions that encompass a significant amount of upfront expense on your part, or you are extending credit to the customer, you should obtain a judgment search that tells you what judgments and liens have been filed against a customer. In some businesses, obtaining judgment searches and credit reports are common place, but in others they are not, but should be. Many service companies will enter into lengthy contracts with a customer without any idea of the customer’s financial condition or default history.
- Corporate Status Searches: For a small fee, the State of New Jersey allows you to obtain a “Corporate Status Report” on businesses/entities doing business in the State of New Jersey. The reports will tell you if the business is “legally” still in existence, has been merged, operates under different names, who its officers are, and other valuable information. This information can be very helpful if you are faced with filing suit against a customer and collecting on the judgment.
The above steps should be taken prior to a customer’s failure to pay and prior to learning about a customer’s financial troubles. By the time a customer defaults, it may be too late, as it may have already taken steps to try to make itself judgment proof.
If you are interested in learning more about ways to prepare your business to be in the best position if and when you have to file a lawsuit against a customer, or if you are currently contemplating taking legal action against a delinquent customer, please feel free to contact Daniel S. Eichhorn, Esq. or any other attorney at our firm. Schiffman, Abraham, Kaufman & Ritter, P.C., 201-488-2600