Shortening the Collection Curve

By: James M. Lloyd

prepared to exercise maximum leverage. The right of possession of the collateral or leased property upon default in payment offers a tremendous advantage. Even if the property has little value to you, the fact is: if it is critical to your customer’s ability to operate, then it may be what gets you paid.

When payment defaults occur and assuming the customer ignores attempts to work out the debt, the prudent creditor with a right of possession will waste no time accelerating the entire balance due and providing the customer with a notice of default and intent to repossess the property. A visit to the premises in an effort to peacefully repossess the property may seem extreme but this will get the delinquent customer’s attention. If peaceful repossession is not an option then consider retaining outside counsel to make demand upon the customer and to inform the customer of the intent to file a suit in order to seek payment of the debt and to seek a replevin (pre-judgment order of possession) of the property. Any delay in bringing the greatest amount of pressure for payment sooner rather than later, can materially reduce the odds of getting paid.

Establish a Consistent Collection System

Those creditors who follow an established set of standard operating procedures when dealing with delinquencies will enjoy a greater return on delinquent dollars.

The telephone remains the best collection tool. Calls to customers that fall delinquent send a clear message that prompt payment is expected. In tough economic times customers will take advantage of lax collection procedures. Periodic calls also enable the diligent creditor the opportunity to inquire as to material changes affecting the customer’s ability to pay as agreed. Collection calls should result in a definitive plan that should be confirmed in writing. Email has greatly simplified the ability to confirm arrangements in writing in a timely and efficient manner.

There have been a variety of studies that indicate as much as 28% of a verbal message is forgotten after one day, 48% after one week, and 70% after one month. The written follow-up not only assures the account of your persistence, but also establishes an important link in the paper trail that may one day help establish your claim in court. Repeat calls on a consistent follow up basis will improve your credibility with any slow pay customers.

Any request by the customer for additional time should be met with a request for additional security. This could be as simple as a request for updated financials or a personal guarantee if not already obtained. Establish an expectation of a Quid Pro Quo.

Records Retention

Nothing delays the collection process more than the unavailability of all of the necessary documents to establish the validity of your claim. Recalcitrant customers will request documentation and attempt to create subterfuge as a means of buying time. Be prepared to satisfy any reasonable request for a document trail without delay.

Develop a records retention system that assures you can support your claim with legible copies of any credit applications, contracts or leases. This would include other supporting documents including UCC’s, purchase orders, delivery receipts, installation acknowledgements, invoices and a concise statement of account and payment/credit history. Emails and any other written communications with your customer, particularly promises of payment can be very helpful.

Tighten Up Contractual Provisions and Credit Applications

Review your current contracts, leases, and credit applications. Be sure to address specific remedies that increase your leverage and which will tend to dissuade your customers from relegating you to the bottom of the accounts payable list.

Specific rates of interest upon default, provisions for attorney fees and/or collection costs, personal guarantees, favorable jurisdiction and venue provisions, limitation or waivers of damages, waivers of jury trials and arbitration clauses are just some of the items which should be considered.

Forbearance Agreements

When a customer defaults upon payment terms and needs time, at the very least demand a written proposal from the customer to cure the default as set forth above. It is also possible to seek a formal forbearance agreement, providing for payment over a specific time frame. This reduces the possibility of a belated dispute or defense to payment.

Many states allow pre-judgment consent or agreed judgments which can be enforced in court by an attorney on your behalf. When possible this can significantly lessen the time and costs associated with litigation.

In conclusion, it is important to prepare for collection problems before they arise. As once famously said, by Damon Runyon, “The race is not always to the swift, nor the battle to the strong, but that’s the way to bet.”


James M. Lloyd is managing partner of Lloyd and McDaniel PLC, a third generation law firm headquartered in Louisville, Kentucky that specializes in creditor’s rights. For more than 50 years, the firm has served the leasing industry and financial institutions. Mr. Lloyd is an author and lecturer on topics related to debtor/creditor relations, secured transaction, and statutory liens. He is board certified in Creditor Rights from the American Board of Certification and has held a variety of leadership positions with the Commercial Law League Association, including member of the Board of Governors.

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