Hiring A Collection Agency For Unpaid Invoices

Check out this recent article from Less Accounting on how to collect your debts effectively:

Your client hasn’t paid the invoice you sent them and it’s really late, so now what?

Let’s start with a hypothetical situation. “Beachy Design Studios,” a Florida-based design firm, lands a big awesome website project in 2011 with “Mountain Top Hotel,” a Colorado-based hotel chain. Beachy Design Studios uses a service contract and Mountain Top Hotel signs the project, pays the deposit and the project starts. The contract is an hourly one and the client pays each month after receiving an invoice. After six months, Mountain Top Hotel gets behind on their payments, and after another 30 days of work Beachy Design Studios stops work.

Hmmmm, okay…now what?

Beachy Designs Studios tries to collect on these unpaid invoices, calls the client, and gets nothing. The client doesn’t want to pay anymore.

Now what? It’s time to take legal action.

Send a Demand Letter, Before Hiring a Collection Agency
Beachy Design Studios sends a demand letter to the client, which is a mailed, certified letter written by their attorney that…yep…you guessed it, demands their money or threatens legal action. Read this article on writing a demand letters.

Common Question #1: Will a demand letter work?
Lawyers love to say, “It depends,” and the same applies here. It really depends on the situation. Most lawyers will ignore demand letters from opposing counsel. You might just be wasting time here, but who knows? Maybe the client will fork over the money you’re owed.

Common Question #2: Do you send multiple letters?
You could send a number of letters but it may or may not help. It really depends on the kind of person you are dealing with. If the person doesn’t respond to you, we doubt a demand letter (or multiple demand letters) will serve any real purpose. At the same time, it could provide the necessary jolt they need to get off their feet and take you seriously. It could force the client to call you and say, “Hey, let’s forget this whole ordeal, I am sending you a check right now.” Or it could lead to, “Who is this guy? Ignore this, this is a joke.” Either way, you can go through the motions of a demand letter and see how it plays out, or you can dive straight into the meat of things.

Common Question #3: Besides getting the money, does this letter help your legal case?
This letter could serve the “negotiation” element to your case. It will help you shape the issues and arguments you can potentially use in your case while conveying to the other side your specific goals and objectives. At first bite, it shows the other side that you have legal representation and provides notice of a claim. It subtly sets the tone for the negotiation.

First Legal Step: Dig into Contract
FYI: here comes some service contract legal jargon.

In Beachy Design’s situation, there is a contract that has a requirement for negotiation as a first step and when that fails, arbitration. The great thing about this contract is that the arbitration clause has a provision for arbitration expenses and attorney fees to be paid by the client (the defaulting party) and not the service provider. This means the out-of-state company, in addition to figuring out arbitration in a completely different state, will have to cough up expenses for both sides.

From a practical perspective, the client may not want to deal with this expense and may give in. We cannot predict how the client will react, but if we were in this situation, we’d probably be better off just paying our service provider. In the alternative, if the service provider chooses to file a complaint in a Florida court, the client, since he is out of state, still has to find a local attorney to defend him or her in Florida. The purpose of this language in the contract is so the past due client will think, “OMG the fees are going to cost me so much money, I’ll just pay my bill.”

Option 1: Lawyer Up
You may be better off pursuing your legal options. Here’s how to find and hire a small business attorney. We’re not going through legal scenarios because that depends on your service contract and how your attorney wants to handle this situation.

Option 2: Hire a Collection Agency
Finding a collection agency is similar to finding a lawyer.

Click here to read the full article.

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