more-arw search

Q&A Forum

How do you decide if you should sue a customer for non-payment?

Roger Frederick's Profile

suing customers for non-payment

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

ROI. Is the outstanding receivable (in no particular order):

- So egregiousness that after costs, you walk away with a substantial reduction of loss?
- Is the law suit going to be "public", so that other customers understand your position of issuing credit and risks of non-repayment?
- Are you willing to loose the client?
- What clout does that client have in your industry?

And regardless, one should ask:
- What did you do wrong in the first place that caused this situation?

Anonymous
(Senior Manager - Strategic Analysis) |

I have to agree with Wayne, I would add an additional consideration:

-Why are they not paying?
Is it a problem you can help correct (or at least better avoid in the future). If they don't have funds, remember a court can't make a stone bleed anymore than you or I can, and its very expensive to go through the process of watching them try.

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

I had a client ask me this exact same question. I responded -
"Are your records in order?"
"Do you have clearly established agreements with payment terms signed-off by this customer?"
"Do you enforce these rules or have you historically not followed your own policy?"
Suing is always an option, but if you go down that road - "Are you prepared?"
Alternatively, you may file a suit and the customer knowing they are wrong, may pay up and avoid the legal expense to them. But there is risk in this approach.

Topic Expert
Linda Wright
Title: Consultant
Company: Wright Consulting
(Consultant, Wright Consulting) |

My experience is that a work out is always better than a suit. However, sometimes the threat of a suit is the means to establishing the terms of work out.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

A law suit, out of the gate is a minimum investment of $10-15K.

I agree, a workout where you, the company eats even 1/2 that amount and you become a winner!

Ray Calabrese
Title: Treasurer
Company: Interim Treasurer
(Treasurer, Interim Treasurer) |

These are all good points and right on the mark. I always solicited help from the sales people, as they have a different relationship with the customer and in many cases was helpful. Before I ever sued anyone for non-payment, my company understood, in detail, what the situation was about and everyone was on the same page.

There are obvious implications, i.e., you're going to lose a customer and there will be some short term bad will and the process could be expensive. However, you reputation as a company is also on the line and you have responsibilities to your shareholders to protect the company.

Topic Expert
Doug Thompson
Title: Director of Revenue
Company: Castlight Health
(Director of Revenue, Castlight Health) |

Hand it over to a collection agency instead. Let the customer know first. You can also tell them you are reporting it to D&B. No cost to you.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Why are you giving 30% or more away? And telling D&B isn't worth anyone's time, they are a joke in collections.

Jeffrey McCandless
Title: Managing Partner
Company: Stone Harbour Partners
(Managing Partner, Stone Harbour Partners) |

Interesting subject and some of the above briefly touch on my take on this topic. In my experience, non-payment situations arise because of the following:

1. Client Satisfaction-70%
2. Client Cash Flow Issues (Temporary)-20%
3. Client Bankruptcy, etc.-10%

In reverse order and being mindful of the comments already made:

3. Client Bankruptcy-don't waste time with these accounts except to evaluate whether it is worthwhile to file evidence of a claim, participate on a creditor's committee, etc. based upon overall exposure. By the time a client bankruptcy occurs, it's too late to do anything about the cash flow effects on your company. You should have already figured out the remediation strategy to be implemented, if any. Distance yourself from potential 90 day payment preference claims.

2. Client Cash Flow Issues (Temporary)-working through this in a thoughtful manner that is a win-win that can build tremendous goodwill with clients. Work through a mutually agreeable payment plan that liquidates the existing debt plus results fresh credit to ensure your client's survival and ability to generate new cash flow to pay the new credit but also the credit subject to a payment plan.

1. Client Satisfaction-this one's the silent killer. Every manufacturing or services firm that I have ever walked into after being retained to evaluate the reasons for a high level of Days Sales Outstanding or Average Age of Receivables invariably has quality control or delivery issues. Clients hold the only thing over the company's head that they can-payment!!!! These issues mask or disguise themselves in various ways such as invoice short-pays, invoices deliberately not paid, or projects where the level of effort billed or invoiced far exceeds the actual project completion to name a few.

Remember, for a company with an Operating Margin of 10%, each $10,000 written off because of client satisfaction issues requires an incremental $100,000 in new sales or revenues. This is huge and inevitably companies take these types of write-offs or write-downs much easier than actual credit losses. Are you giving away profit and cash flow?

Topic Expert
Patrick Dunne
Title: Chief Financial Officer
Company: Milk Source
(Chief Financial Officer, Milk Source) |

We sue to collect when it obvious that the customer will not pay or has taken means to avoid communication. You have to make sure that are not any true quality issues around the product or service. We also communicate to the customer that we will take that step if they don't respond and pay their debt. One of the methods used to avoid making payments that we have seen lately is the takeover of a business by another. This is a way to avoid a bankruptcy filing. We have learned to quickly sue in these cases.

6571 views

Get Free Membership

By signing up, you will receive emails from Proformative regarding Proformative programs, events, community news and activity. You can withdraw your consent at any time. Contact Us.

Business Exchange

Browse the Business Exchange to find information, resources and peer reviews to help you select the right solution for your business.

Learn more

Contribute to Community

If you’re interested in learning more about contributing to your Proformative community, we have many ways for you to get involved. Please email content@proformative.com to learn more about becoming a speaker or contributing to the blogs/Q&A Forum.