Bad checks and bad credit

How to protect yourself from, and deal with, bad checks and un-creditworthy customers. June 7, 2000

Up to now, I've gotten 50 percent up front, interim payments, and balance on delivery. But recently I ran into a dishonored check after the buyer had the goods.

What can a small shop do to check out the customer (individual and business) before the contract is signed? What are the usual practices in the industry regarding requiring data on the property owner and the property address to prepare for a lein if future trouble arises?

Forum Responses
This is the toughest arena small business operators are forced to play in.

A couple of methods I prefer are personal guarantees (PGs) and confessions of judgement (CJs), if allowed under the laws of a particular state. Also, it is important to conclude the transaction in your state if at all possible; this gives you "home-field advantage" in court.

PGs require the spouse's signature to be enforced, along with regular updates in the case of ongoing business. CJs are exactly that, a "confession of obligation" to pay in full a verifiable invoice.

Both of these collection vehicles are very tough to negotiate with a multi-shareholder entity, but not impossible. After all, virtually all leases and loans require the personal signature of a corporate officer, so it's not totally beyond the realm of possibility.

One more thought: Anyone who balks at a PG should be reminded of the personal guarantee you're making to them, regarding cost of the work.

Lien laws vary by state so you need to know local law or the law of where you are shipping. You can join a credit reporting gourp or take advantage of a service.

You should at the least get a legal property address, and a lender name, if any. If you are dealing direct you could give the check to a secretary and walk them out to the plant while she calls and verifies if the funds are in the bank. In Calif., a bad check gets you three times the amount if you can collect, so you could go to small claims court if the amount is over the limit.

If you have a bad check, that is an entirely different matter than bad credit. The two are not necessarily related.

Take the check and file in small claims court, and talk to your County Attorney right away! If you have been given a check that is not collectable the issuing party is guilty of fraud! Most jurisdictions will prosecute as such.

A daily call to the bank it is drawn on may be in order as well. You may luck out and get the funds one day.

These guys give some great advice. My question is what happens in interstate transactions? Not bad checks, but nonpayment.

I saw an ad for a collection agency that would do face-to-face collections for amounts over $2,000.

It's unfortunate for new accounts of mine when I have to set stringent terms on payments. Some people get offended when you are just trying to cover your own tail.

From the original questioner:
Thanks, guys, for all the wonderful information.
In reformulating my terms I'm coming up with the following -
1. 50 percent to start.
2. Interim payments on time, or stop work (identified as "stop work not walk off job" in contract).
3. Balance payment due on my notice in guaranteed funds, in hand before shipment. I'll post photos on the Internet for buyers who question completeness.
4. Where work is to be attached to real estate, get info for any possible mechanic's liens.
5. Established customers enjoy more accommodation.
Can you think of any area, in your experience, a one man shop would still be vulnerable and that could be protected by further safeguards?

Add a project completion date. If you are waiting long periods of time for a contractor to finish his work so you can install your work, that could drag on and on and on.

To further refine that, include language that requires payment when you are complete with fabrication, and if you are installing, break out the difference. Get paid when you are done, or, if a large project, get paid monthly.

Comment from contributor A:
We make it very simple so everyone is protected. We are a design/build firm, so we design it, build it and install it. We recently changed the way we do this also, and it is working quite well thus far. We get...

25% initial deposit (this amount also covers design fees, etc.)
25% upon full measure (approximately a week later)
25% upon job start (on-site phase of work)
15% upon successful completion of inspections
10% upon completion CERTIFIED FUNDS ONLY

Also, to ensure the customer comes up with the certified funds, on the final day, our lead installer must request verfication of the certified funds prior to working. If the funds are not available, they are politely rescheduled. We collect this check at the conclusion of the work, and after they sign a satisfaction form, which also affords them the opportunity to provide feedback on our product and performance. We do this for quality control and for legal reasons, although we've never had to take a client to court, knock on wood.

Also, to protect our cabinetry to the end, we hang our doors and drawer fronts last, so it minimizes any chances of dings/scratches, etc. (it also ensures we are paid by having this leverage, and it provides a good "Ah" effect at the end of the day).