This tiny paragraph in your sales agreement could save you thousands
Adding collections language to your agreement can save you big on collection fees if you ever need to send an account to collections.
As you might expect, we've seen quite a bit from our customers over the years. Everything from sales agreements that were nothing more than a handshake or (figuratively but sometimes literally) scribbled on the back of a napkin.
It will come as no surprise that it's super important that you have solid agreements and paperwork in place when you perform a service for your customers. This protects not only you and your business, but also protects the customer as well and is a great place to set expectations for customers about things like payment terms, delivery of service and consequences for late or non-payment. You can check out our other resources on how important a good process is to getting paid for your work.
If all of that sounds like preaching to the choir, you might still be interested to know that many businesses that go on use CollBox to help them get paid, don't have anything in their agreements protecting them from having to pay collection or legal fees when they attempt to collect on a delinquent account with either a collection agency or an attorney.
What we mean by that is:
Specific language that communicates to the client that, should you need to send them to collections for non-payment, that they are responsible for all reasonable collection and legal fees associated with recovering the past-due amount, not you.
In case you're not aware, most collection agencies and many attorneys charge a percentage of the dollars they recover as their fee. This is called a contingency fee and it will vary wildly depending on factors on the account such as age, amount, type of debt and much more. (CollBox calculates this for you automatically when you use our free platform to get the best rate from one of the vetted, ethical agencies in our network, all in just a few clicks).
With adequate language to this effect in a signed agreement, the collection agency or attorney working to collect for you may be able to add their fees on top of the amount owed, potentially offsetting your costs completely.
Even if they aren't able to add those fees in (there are exceptions based on where you do business as well as the debtor's location), this language has been shown to reduce the risk of delinquency as it shows that you have a clear plan in place if they should not pay you and will have the added benefit of showing them you've thought this through, reducing the likelihood of you being the vendor they choose not to pay or pay late.
Okay, that sounds great, but what language should I use? Check out our sample language below to get an idea of what might do the trick:
(Disclaimer: You know the drill, none of info contained in this article constitutes legal advice and CollBox is in no way responsible for the result of changes you make to your business processes and highly recommends that you consult an attorney or legal counsel before making any changes to your legal documents)
Good? Alright, take a look below for what a sample section in your agreement might look like:
COLLECTION AND LEGAL COSTS The Recipient agrees to pay without limitation any and all costs incurred by the Provider in the process of attempting to collect in full on the balance of the account as outlined in the terms of this Contract, including but not limited to fees paid to a 3rd party debt collection provider and/or reasonable attorney fees. In addition to any other right or remedy provided by law, if the Recipient fails to pay for the Services when due, the Provider has the option to treat such failure to pay as a material breach of this Contract, and may cancel this Contract and/or seek legal remedies.
At the end of the day, it's impossible to prevent all bad debt write-offs. There are any number of reasons that a client might not pay for your work but that makes taking preventative measures like the one above all the more important. At CollBox, we're here if you need to get matched with a great provider to help you get paid for your hard work, but we're also committed to arming you with the knowledge to prevent that from happening as often as possible.
Do you have a different approach? Let us know in the comments below or reach out to us at firstname.lastname@example.org as we'd love to learn what's worked for you.
Still having issues after trying everything else? Give CollBox a try by signing up for a free account and seeing what we can do to help you get paid.
If you're an accounting professional and want to help your clients stay on top of their receivables, make sure to grab a free account specialized for accounting and bookkeeping firms to help manage AR for their clients.