Best Practices in Keeping Accounts Receivable from Default

Many businesses allow their customers to purchase goods and services on issued credit. Rather than requiring cash up front, the business will ultimately allow the customer to pick up the goods or acquire said services without paying first. Instead, the business will invoice the customer after the fact, and hope that payment will then be made by the customer according to the payment terms of the credit agreement.

Unfortunately, sometimes the customer fails to pay in a timely manner, and the account then falls into delinquency. In the worst-case scenario, the customer never pays, and the business is left with an outstanding debt of hundreds, if not thousands of dollars.

How do you as a business prevent your accounts from going into default? Here are a few ways to protect your business:

  1. Put your credit agreement in writing. It is always a good idea to have your customers fill out a credit application that includes the terms on which credit will be extended. For instance, this should include things like payment terms, interest rate, cost of collection, what is considered defaulting, etc.
  2. Get a Personal Guarantee. While the business may be applying for credit, it is always a good idea to get a personal guarantee (usually from the owner of the business) that the customer’s account will be paid in full in a timely and adequate manner. A personal guarantee helps to give your business more leverage in the event that the company goes out of business or refuses to pay.
  3. Set a Credit Limit for New Accounts. If you haven’t done business with a customer before, it is smart to set a limit on the amount of credit you are willing to extend to them. Setting this limit helps prevent things from getting out of control. The limit that you set should depend on a number of things, such as: your comfort/risk level, the cost of your product and/or services, in addition to the particulars specific to the applicant in question. After a history is developed with the customer you may remove or raise the limit of his or her available credit.
  4. Establish Procedures for Follow Up. Make sure you are sending invoices on a regular basis. If payment is not made by the due date, schedule a follow-up notice to be sent to the customer shortly after the predetermined due date. The time periods for follow up can be whatever you deem necessary and may vary depending on industry standards—but set the procedure for follow up and stick to it. Make sure the procedure is applied to all accounts at all times.
  5. Act Quickly. When it comes to past due accounts, timing is important. The longer time passes from default, the harder it will be to collect. Money and assets from which to satisfy the debt could be lost or depleted significantly. When an account goes into default and your internal procedures for follow up with the customer have been exhausted, it’s time to act quickly. Send the account to your attorney or collection agency for prompt collection activity.

Are your clients frequently defaulting on their payments? Or even worse, are they refusing to pay you for goods and/or services that they have already acquired? Consulting with an experienced and effective attorney may be the next course of action for you and your business. You can reach me at my direct line, 801.365.1018, or you can e-mail me at

Skoubye, Nielson, Johansen Attorneys Salt Lake City Utah

Kevin M. Bischoff