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How to Deal with Deadbeats

Steve Sobiek has noticed that the list of judgments against individuals and companies, chronicled in the back of his newspaper's business section, has grown a lot longer lately. "Businesses are having a hard time paying their bills," says Sobiek, who heads Wisconsin's Independent Business Assn.

Ron Deabler, whose Brookfield, Wis., business supplies temporary workers to the manufacturing industry, has noticed the bill-paying delays, too. Many client companies are telling him they're changing their payment schedules: Instead of paying 20 days to 30 days after getting the bill, they now take up to two months. "Further, we have been hearing from companies -- who are not communicating in such a nice way -- that we will be lucky to get paid at all," says Deabler. "It's very tough."

Business owner Joanne Culver is frustrated about having to, as she describes it, "float a loan" to multibillion-dollar corporations that are stretching out their payment schedules. "Their attitude, unfortunately, is that we should be grateful that we have their business, and we just have to accept that they will pay when they decide," says Culver, owner of Provista, a software consulting-and-training company, in Fremont, Calif. She estimates it now takes an average of 60 days to get paid, vs. 45 days a year ago. Culver knows small-business owners who have taken out home-equity loans to keep the cash flowing as they wait for clients to come up with the cash. "It is scary," she says.

CASH-FLOW CRUNCH. One of Deabler's clients, who had always been a prompt payer, called recently to tell him about a cash-flow problem. The client's main customer, "a very large company they cannot live without," has adopted a 90-day payment policy. "This may put our client under," says Deabler. "They are tapped out on their line of credit and cannot make payroll. They are a viable business with a good backlog and reputation, but they have no cash," he says, adding: "I think this is a typical scenario."

Like Deabler's client, most small companies facing hardship because of a big corporation's stretched-out payment policy won't talk about it on the record. They don't want to alienate the customers whose business they desperately need. Deabler and Culver are operating in two sectors especially hard hit during this economic slump -- manufacturing and technology. But small-business owners in other sectors, too, also are seeing more slow payers. "It's not just big vs. small," says Sobiek. "It's all over the board."

One in five small-business owners expects to spend more time than usual this year collecting debts, according to a recent Dun & Bradstreet survey. In a few cases, debts will be uncollectible, say those who advise business owners about getting what's due to them. But most bills can be collected -- so long as the right approach is taken. Here is what the experts recommend:

Have a written policy. Let customers know up front when you expect payment. Most businesses do not have such a policy, says Len Sklar, a debt-collection consultant in San Carlos, Calif., and author of The Check is Not in the Mail. Not having a policy actually means the client sets the policy, says Sklar, who stresses: "Never tell them after the fact something you could have told them ahead of time, especially if it concerns money."

Do a credit check. Advisers differ on whether such documents are worthwhile, citing problems with accuracy and timeliness. They're viable in many situations, though, says Gene Fairbrother, adviser to the National Association for the Self Employed. If you're going to do business with McDonald's Corp., you don't need a credit check. If you're going to do business with a franchisee who owns a couple of McDonald's restaurants, check his credit, Fairbrother advises, adding: "Turn down the business if the credit check is negative." If the credit report is poor, other options are to insist on payment up front or in increments as the work progresses.

Bill sooner rather than later. Don't wait until the end of the month to send a bill. Once-a-month billing, says Fairbrother, is an outdated holdover from the days before computers.

Call sooner rather than later. The longer you wait for your money, the less chance of collecting it. Debt-collectors' statistics show that 80% of accounts between one month and four months old can be collected. Bills from 4 to 12 months old get paid just 20% of the time. "The typical small business is the worst at hanging on too long," says Sklar. "Get on the phone and find out whether you will get paid." Calling early makes you the squeaky wheel. It shows you are serious about following your written policy on payments due. Not calling for 4 months could give the client the idea that you're lackadaisical about debt.

Departure from norm is a red flag. Someone who has always taken 60 days to pay should cause less concern than the client who, all of a sudden, starts taking 60 days to settle bills that once were paid in half that time. "There's only one reason they're not paying that bill on time -- they're having a cash-flow problem," Fairbrother says. Find out whether it's a short-term problem or a long-term one. "Every situation is unique," he says. "You have to make a decision based on the particular circumstances and how well you know the company."

No more Ms. Nice Girl. The No. 1 reason most small-business owners don't get on the phone when a bill is overdue is because they're afraid of offending the client, says Sklar. There's no need to be nasty when you call, but you do need to call. If the client says he'll pay, nail down that promise by asking for a specific date. If the check still hasn't arrived when the customer said it would, call again. After the third or fourth call, you no longer need to be friendly. Instead, explain your willingness to bring in a collection agency or attorney. "The point," says Sklar, "is to communicate so well that they either pay you -- or you discover that they're not going to pay."

Reward good behavior, not bad. When a client who was having financial troubles came through with the money it owed Culver, she personally delivered a bottle of California merlot and a handwritten note of thanks to the CEO. "When I know they're choosing to pay me over somebody else, that's when I'll take a gift," says Culver, who now gets prompt payment each time from the wine recipient. It's a smart policy, says Fairbrother. "What small businesses need to do is quit sticking smiley faces on the past-due notices. Instead, send a personal note to someone who pays promptly."

Big can be brutal. Even the pros acknowledge that the typical small business has very little clout when it comes to the payment policies of huge corporate clients. Still, it doesn't hurt to ask, says Sklar. Some understand that small businesses often don't have a deep cash cushion, and will shorten the payment time for them. The best solution is to avoid being vulnerable to one company. "If the solvency of your business depends on one client, you have a much bigger problem than whether they're going to pay you or not," Fairbrother says. "You are not diversified enough."

Take 'em to court. If you haven't collected the overdue bill within a couple of months, your options are to turn it over to a collection agency or a lawyer, go to small claims court or, of course, simply write it off. Some small-business owners see collection agencies or lawsuits as too much of a hassle and expense. According to Sklar, statistics show small-claims court is a good bet. Once a defendant gets a summons, 30% pay right away while another 30% don't show up in court, giving the plaintiff a default judgment.

As bills get even more difficult to collect, small companies might be less squeamish about taking legal action. For some, the choice could come down to small-claims court or bankruptcy court. By Theresa Forsman in New York

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