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Recently a plumbing company placed a large dollar account with us for collections. The amount was around $14,000 and was a great deal of money to our client. We looked at his contract, which allowed the cost of collections to be added if the account became delinquent, which obviously it was. The clause allowed us to add our collection fee to the balance due, and give the plumbing company one hundred percent of their money once it was collected. The contract was signed and legally binding.
Everything was looking good until we realized the company that owed the money was a corporation and there was no personal guarantee clause in the contract. A call was made to the corporation. The first words out of the corporate officer’s mouth were “I’m closing the corporation and there are no assets.” What that means, in most cases, is this may be the end of the road in reference to getting the debt paid.
I called our client and told him that it was looking less hopeful that we would be able to collect his money. He wanted to know if we would sue the business owner since he had such a nice vehicle and owned his own home. I had to explain to him the difference between a corporate debt and a personal debt. Because the plumbing company did not have a clause in his contract that included a personal guarantee we would not be able to pursue the owner (corporate officer) personally. He was protected by the corporation; his personal assets could not be pursued.
Are there exceptions to the rule? Sure, but the procedures would be very timely and very expensive and will probably prove to be futile. If our client would have had a personal guarantee from his customer the likelihood of collecting his money would increase dramatically since the owner (corporate officer) had assets to pursue.
If your business performs services for other businesses one of the steps you can take to minimize your financial losses is to have a good solid contract. I would definitely recommend you include in your contract a clause that allows the cost of collections to be added in the event of delinquency, and a clause that states the applicant is personally responsible for the debt. Contracts which include these precautions will minimize monetary losses to your company. Additionally, it will be money well spent to seek an attorney’s advice on preparation of your contracts.
Don’t be intimidated by companies that question or refuse to sign your contract. Consider it to be a red flag.
(Editor’s Note: Paula Bartlett is the owner of Saba & Associates, a professional collection agency located in Poulsbo. Reach her at 360-698-1432.)
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