Borrowers of all types are still facing the harsh reality of being overextended in a tight economy. And unfortunately, credit professionals are still playing a central role in that reality. Losses from default and bad debt are inevitable, but there are ways to minimize the impact on your bottom line. Follow these five tips to help soften the blow.
1. Review your documents: The worst time to discover defects in your loan documents is after you’ve started the adversarial enforcement process. At this point, it may be too late to have the customer agreeably sign any corrective documents. Even more dangerous is the Bankruptcy Trustee, who can exploit certain defects in security documents and take collateral from both the customer and you. Before you declare default, take a few minutes to review the signatures and terms of your loan documents and to confirm that your collateral documents are in order and properly recorded.
2. Strengthen your position: If there are no defects and your customer needs more time or more money, use this as an opportunity to negotiate for additional collateral or other security for your credit advances, such as an additional guarantor. The customer will appreciate your assistance, and you’ll improve your chances for repayment.
4. Know your customer: Collecting on unpaid bills doesn’t start when you send your attorney an unpaid account; it starts when your new customer fills out its Credit Application. In your Credit Application, be sure to have your customers provide banking references, all corporate information, and personal guarantees of the company’s principals. When your customers pay by check, keep copies of the checks. When your lawyer obtains a judgment, those banking references and old checks will be the first place you’ll start your collection efforts. When you suspect that the customer’s business is suffering, take an hour and visit your commercial customers at their business or job site; if done right, it builds a good relationship, as well as provides you an opportunity to confirm that business operations are running smoothly.
5. Bend, but Don’t Break: The days of easy credit are long gone, and so should be the days of threatening to shut down businesses unless payment in full is received in 48 hours. Granted, there is still a time and place for such hard bargaining, but savvy lenders know that a little bit of time and well-placed cooperation can make the difference between a bankruptcy filing and a customer being able to ride out a rough patch.