I don't need to tell you that getting paid by your customers for whatever your small business is offering for sale should be your number one concern.  Here are some pointers for handling this most important aspect of your small business.

Prevention, Prevention, Prevention

Ask for money in advance, whenever possible.  Ask for periodic advance payments, whenever a mile stone has been reached or come up with other periodic payment dates after partial performance.  Send invoices as soon as possible.  Have an agreement with your customer that clearly, unmistakably, sets forth WHEN and HOW MUCH your customer has to pay.  More on that below.

As soon as your customer is late on payment, follow up and start the collection process.  Resend the original invoice periodically, which then, under certain circumstances (check with your lawyer), can become an "account stated" and makes it easier to ultimately collect in court.

But don't harass the customer and consider having someone else make the reminder call in order to protect your relationship with the customer.

Investigation

Once a debtor is unresponsive to all your preliminary debt collection attempts (repeated invoices, calls), do some intelligence work to find out if your debtor has money or assets to pay his or her debt.  You can get a credit report on them (Permissible Purpose to get Credit Report).  

Find out if the debtor has litigation pending by checking the available court resources: For example, Civil Court of New York City, Supreme Court.  Many other courts have ways to check online whether your debtor is already a defendant in any court case.

You do this investigation to avoid spinning your wheels where a debtor is judgment proof, i.e. it would be a waste of time and money to go after them, because they have essentially nothing.

Collection

At this point, you could hire a collection agency to collect the debt for you.    They will usually charge a percentage of the debt.  If the debt is less than 90 days old, the charges may be less.  See here for one debt collection agency's rates (no affiliation, whatsoever).  This goes to show again, that making collecting your outstanding invoices a priority as soon as a customer is late, can mean a difference in actual dollars.

Going to Court

I am sorry, if you actually have to go this far.  In court, you will have to present hard facts, in particular, a legal basis for your claim for money.  In most cases, this will be an enforceable contract between you and your debtor.  As I stated above, it is crucial that you have valid and enforceable agreements with your customers.  This doesn't always mean a lengthy written agreement, it can be the terms and conditions on your website, if the customer is aware of them and agreed to them; the writing on your order forms and so forth.  Most important is that you can show that your customers agreed to your terms.  A signature is best, a click on something on your website that states "by clicking on this you agree……." may work, but this is an area where you can really use a lawyer to make sure that your customer arrangements will hold up in court.  

Aside from the legal implications, for customer relations and avoidance of surprises and disputes, it is also crucial that your customers KNOW what and when they owe you money.  So make whatever agreements or terms you have, very clear and visible. 

Via Small Business Trends, I learned about this helpful e-book "Small Business Guide to Risk Management – A complete guide for business decision-makers" published by the Association of Small Business Development Centers.

From the introduction:

"Risk management involves eliminating, mitigating or insuring the risks your business faces so you can more confidently pursue the rewards of risk-taking.  How do you know what these risks are?  By conducting a thorough risk assessment of your business, its operations and its policies."

The e-book explains what risks businesses face and provides tips and tools to assess those risks and mitigate them to the extent possible.

It investigate risks inherent in a business’s legal structure, business plan, economic environment, marketing, operations, human resources, leasing, intellectual property, and international trade.

Business owners at war can get divorced.  If all therapy fails and the fighting business owners cannot agree on an amicable separation, they could file for divorce.  In New York, shareholders who represent 50% of the votes of all outstanding shares of a corporation entitled to vote in an election of directors can petition a court to dissolve the corporation when

"there is internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders."  See New York Business Corporation Law Section 1104(a)(3).

In fact, as described in this in-depth article on the topic, the typical petitioner under Section 1104(a)(3) is a minority shareholder (minority in ownership, but equal in voting rights) looking to be bought out by the majority shareholder and trying to get an upper hand in the negotiations by going to court.

But, as everybody knows, litigation strategies and tricks are costly, staying out of court is priceless.  While conflict is often inevitable, smart business owners prepare by adopting a  Buy-Sell Agreement as part of a shareholder agreement, operating agreement or partnership agreement. 

Related Post:  Going into Business Together – Don’t rely on a Handshake!

My post on September 14 talked about conflict resolution and the resources available at the American Arbitration Association. 

In the meantime, I discovered another great resource for domestic and international arbitration issues:  Lovell’s International Arbitration Guide.  This site offers extensive information about arbitration, even  a drafting engine that automatically drafts an arbitration provision for you!

The site is free, but you have to register.  Hey, there is nothing wrong with using Big Firm resources without hiring them.

Httpwwwflickrcomphotosburps2955578As a business owner you will encounter conflicts; particularly with your fellow business partners.   As in any relationship, it helps to deal with these conflicts rationally.  Easier said than done, I know.

My favorite blog about blogging (Problogger by Darren Rowse)  has a post about "10 steps to conflict resolution."   Darren recommends:

    1.  Set a time and place for discussion;
    2.  Define the problem or issue of disagreement;
    3.  How do you each contribute to the problem?
    4.  List past attempts to resolve the issue that were not successful;
    5.  Brainstorm. List all possible solutions;
    6.  Discuss and evaluate these possible solutions;
    7.  Agree on one solution to try;
    8.  Agree on how each individual will work toward this solution;
    9.  Set up another meeting.  Discuss your progress;
    10.  Reward each other as you each contribute toward the solution;

All good advice when it comes to conflicts with your business partners.  I would like to add one piece of advice:  Contemplate the cost of the conflict.  What are you giving up by focusing your energy on winning the conflict?  How much would you gain by resolving the conflict as soon as possible? You will be surprised how much energy and money can be wasted on inefficient conflict resolution.

In the legal arena it also helps tremendously if you agree on a method of conflict resolution BEFORE any conflict arises.   Rather than bringing the conflict to court which can be extremely costly and time consuming, you may want to agree to mediation or arbitration of any future conflicts.

Mediation is a process in which a mediator helps the parties to reach a solution to their conflict.  The mediator does not have the power to decide the conflict. Think couples therapist without the couch.

Arbitration is a process where an arbitrator comes to a final decision (an award) that is binding on the parties.  Think judges without the court house, bureaucracy and robes.

The agreement to arbitrate or mediate could be in your partnership agreement, shareholder agreement, operating agreement or any other agreement that deals with the relationship between you and the other business owners.

Example of a Mediation Provision

If a dispute arises out of or relates to this contract or the breach thereof and if the dispute cannot be settled through negotiation, the parties agree first to try in good faith to settle the dispute by mediation administered by the American Arbitration Association under its Commercial Mediation Procedures before resorting to arbitration, litigation, or some other dispute resolution procedure.

Example of an Arbitration Provision

Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

The above provisions are just examples and you could agree to more details of your dispute resolution.  For example, you could agree on the number of arbitrators to be appointed, how they are to be appointed and by whom, and where the arbitration is to take place.   You do not have to use the American Arbitration Association; however, many businesses do, since they have offices all over the country and are (in their own words)  "the world’s leading provider of conflict management and dispute resolution services." 

For further information consult this very helpful guide to arbitration and mediation published by the American Arbitration Association:  A Guide to Mediation and Arbitration For Business People.

Finally, for the legal eagles, you can find New York law dealing with arbitration in Sections 7501 through 7514 of the New York Civil Practice Law and Rules.

****Legal Information in not Legal Advice****

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