Legalese: Get proactive to beat bad debts

The following are some practical tips to assist you in your business.

Know your client
At the beginning of your relationship with your client, the client will likely be forthcoming and honest with you. Obtain as much information about your client at this friendly stage of your relationship. Their banking information, their assets, their sources of income, their employment information, entities which may owe them money from time to time and their personal information all can help you collect from them later if they fail to pay you.

Once your client fails to pay you and you are pursuing them, it will become much more difficult to extract such information. You can include this type of information gathering as part of your formal file opening procedures, so that it is not forgotten.

Get money up front
A lot of you are essentially loaning your clients money by allowing them to use your equipment without paying you. Clients can come to expect 90 day billing cycles, or longer. You are not in the business of loaning money. You are not a bank.

Do what lawyers do – collect money upfront from your clients for the estimated cost of the rental. If your clients balk at this idea, then at least you can then make an informed decision as to whether you want to take a risk on a particular person. When you go to a movie, you don’t watch the movie and pay afterwards if you liked the show!

Act quickly
Delay is your worst foe in debt collection. Every day that passes makes it more difficult to collect. Period.

If you are not doing anything to collect your bad debts and the files are literally just sitting in your office, you are losing money. Hire someone on a percentage basis to collect them for you. You won’t have to pay anything unless they accomplish recovery. You have no downside and only upside.

Empower your employees
Your employees are assets that can be used to collect. Give them an incentive to collect from your clients. Provide them with bonuses when they collect an overdue account. Reward them for assisting you with your bad debts and they will help you.

Search court records
Court records are public. In Manitoba, for example, the provincial government has a website which contains all the court records and can be searched by name. So, if a new client approaches you to do business, search him in the courts. If he has been sued five times in the last two years by your competitors for non-payment, the likelihood is he is won’t pay you.

Have automatic thresholds
Everyone is going to have bad debts, but you should limit the damage by implementing hard and fast rules as to how far indebted a client of yours can become. Every business will have different thresholds, but the point is you set your own number based on what you would be comfortable losing. Once a client becomes indebted to you for that amount, you cut them off automatically.

All of the above approaches are ways to help you with your bad debts. There are more. In order to discuss all of your potential avenues of recovery, you should consult an attorney in your province.

Deryk Coward is a partner at D’Arcy and Deacon, a Winnipeg law firm. He is legal counsel for the Canadian Rental Associaiton.