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Past Due

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Past Due


For many small business owners, talking about accounts receivable is about as much fun as being stuck in a traffic jam on vacation. Although there are a few brave souls who truly enjoy collecting past due invoices, for many, it is simply a part of doing business that they would rather avoid. Because collecting past due invoices is not on most people’s list on how to have a good time, many business owners take the following approach:


Step One.  Ignore any past due accounts. “If you don’t acknowledge past due invoices they must not exist… right?”

Step Two. Continue to ignore past due accounts with the hope that any past due invoices were simply overlooked. “The check must be in the mail… hopefully.”

Step Three. Admit that there are past due invoices. “How does this always happen?”

Step Four. Send a second copy of the past due invoice. “After printing a second copy of the invoice, mutter something about how people need to pay their bills on time…”

Step Five. Stamp the second copy of the invoice with the red “past due” stamp and hope the party receiving the invoice can sense your frustration with sending the second invoice. “That will teach them.” 

Step Six. Realize the invoice is now more than 60 days past due and a phone call is required. “But what if they get mad at me… for not paying what they owe me…”

Step Seven. Determine whether an employee or co-worker owes you a favor and request that they make the phone call for you. “They like you, that’s why I am having you call…”

Step Eight. Repeat. “Why am I doing this again?”


If you own a business you have probably been there, asked those questions, and made those rationals. I have been there and I get it. No one wants to talk about accounts receivable. In fact, most businesses that I deal with will wait more than 90 days before considering any action on a past due invoice. As many of you already know, the collection rates for accounts receivable over 90 days are bad. Those rates vary, but most studies would place the collection rate for 90 days past due accounts at under 50%.

For most of you, this is not new information and it is likely you have seen the traditional recommendations on how to collect past due invoices. This may include a second copy of the invoice, a phone call or email, collection agents, small claims court, and sometimes hiring an attorney. To be clear, these ideas can be useful tools in ensuring that you get paid. However, I would like to propose some additional ideas on keeping your accounts receivable from having past due invoices.

What I would like for you to consider is how you treat accounts receivable, before they become accounts receivable. We find that surprisingly few businesses take this approach:

Step One. Have the potential customer or client fill out a credit application. You would be surprised (or unsurprised) at how many businesses miss this crucial step. This step ensures that you have better legal rights if you need to pursue a past due invoice. There are several very important elements to this step.


  • Include the finance rate you will be charging if the invoice is paid late. In 2008, the Ohio Supreme Court ruled in Minister Farmers Coop. Exchange Co., Inc. v. Meyer, that a business can only charge an interest rate that is higher than the statutory rate if it is part of an agreed upon contract between the parties.
  • Request that the potential customer signs a personal guarantee as part of the credit application. This ensures the customer is personally liable even if his business fails.
  • Include a provision of where you would like to be able to pursue legal action if required. Although you may be doing business with a customer who is 500 miles away, you can ensure that you don’t have to go to them to get a judgment.


Step Two. Contact the references from the credit application and use a credit rating service to determine the creditworthiness of the potential customer. Although this step can be more complicated, there are increasingly more service providers that can provide information on the potential customer and you can better determine whether you want to make the sale.

Step Three. Make sure you have a written contract prior to making the sale. In some cases, the credit application can act as your contract. However, there are many situations in which the credit application does not provide enough details regarding the terms of the sale. As many of you already know, a dispute related to the terms of the sale can lead to an unpaid invoice.

Step Four.  Consider requesting a letter of credit from the potential customer’s bank. Although there are some potential customers who will not want to follow through with this request, this is yet another step to ensure that you receive your payment if the relationship does not work out.

Step Five.  For smaller accounts consider requesting that the potential customer pay by credit card. Although there are some small businesses that would rather not take credit card payments because of fees, remember that losing a small percentage of the overall sale is still better than not getting paid. As you can see, these options all happen prior to you ever making your first sale to the potential customer and that is the most important point. The best way to collect a past due invoice is to ensure you do not have a past due invoice and that happens by being proactive when setting up your accounts receivable. However, as any business will tell you, even following these five proactive steps will not always ensure that you will get paid and for that reason, I am suggesting three more steps in case you are still waiting on that past due invoice.

Step Six. Consider filing a lien. Although liens generally require the help of an attorney, they can be very useful in ensuring you receive your payment. Be aware that most liens must be filed within a short time period after the debt is due so don’t wait to contact an attorney if you would like to know if this is an option.

Step Seven. Consider setting up a payment plan. Although this may seem obvious, many businesses will request payment multiple times and perhaps receive a few payments. However, as time goes by the customer stops sending in payments and the business slowly gets tired of hearing the same excuses. A potential solution is to have the customer sign a promissory note for the agreed upon debt. This can include interest and possibly collateral to ensure payment. In some situations, this can also be a cognovit note that allows you to avoid the litigation process to collect your money.

Step Eight. Consider filing a lawsuit. There are some of you that may be surprised this is not higher on the list of options. Although litigation is generally an option, it can be expense and time consuming for the business owner. However, depending on the circumstances and the amount of debt this can be a viable option.

As you can see, managing accounts receivable requires both time and resources. However, in most situations, time and resources spent prior to making the making the first sale to the potential customer will ensure you that spend less time and resources chasing a past due invoice.


Ken Hochstetler

Attorney At Law



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