CHAPTER 6: COLLECTIONS
Check with your own AP department to see if the customer is also a supplier and AP owes them monies. Do not assume that a customer is not also a supplier. You may not know that you buy and sell to the same company. Use leverage such as holding orders or initiating liens. Escalate which individual you call within the customer’s structure (B2B: CFO; B2C: second signature or co-signer). PROMISSORY NOTES Accounts receivable departments are creditors. Every time an invoice goes out with terms—be they net upon receipt, 15 days, 30 days, or more—the AR department is basically extending “mini-loans” to the company’s customers. Despite everyone’s best efforts, invoices sometimes do not get paid in a timely manner. When this happens, AR departments have several options, including sending the unpaid invoices to collections or filing a lawsuit—typically the last resort. However, prior to taking them to court, another option AR can extend to late-paying clients is the promissory note. A promissory note is a formal, legal promise in which the customer agrees to pay a sum of money under specific terms that include a payment schedule and may or may not include interest. Often called a “note receivable” (or simply, a “note”), a promissory note can be an effective tool for getting paid by the customer (possibly with interest). This is a good strategy that should be included in the policies and procedures, with a plan that covers when and how a promissory note will be executed. Promissory Basics A promissory note precisely defines the principal amount, the interest rate if applicable, and the terms of repayment. It also discloses the date when the money is due, known as the “maturity date,” or whether the amount is due upon demand of the payee (in this case, AR and its company). A promissory note can also detail consequences in the event of a default. A promissory note is designed for the unconditional payment of money. Pros and Cons of Notes One advantage of a promissory note for AR departments is the ability to sell the note to raise capital. This is called “discounting the note.” When this happens, the holder of the note can sell the note to a financial institution for cash. However, selling promissory notes can be tricky, as financial institutions will only buy them at a discount and with “recourse,” which puts the holder company on the hook if the maker of the note fails to pay. This ability to raise capital on receivables is similar to AR factoring.
Sometimes it is also possible for promissory notes to be used as collateral and borrowed against.
Another positive aspect of promissory notes is as written agreement of a debt; a court might consider it to be stronger evidence of claim than an open account. Even though clients have signed paperwork and filled out credit applications before being invoiced, an open account is not as strong a message that a client is going to pay as a promissory note is.
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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