Using promissory notes to evaluate the status of outstanding debts.
When receivables age past 60 days, chief executives find themselves in a bind: if they decide too quickly to turn overdue accounts over to a collection agency or attorney, they may wind up paying 30% or more in fees; if they wait too long, their credit rating may suffer as banks discount their chances of collecting too-old receivables.
Here's Matt Hession's solution: The CEO of Key Nursing, a nursing contractor based in Thibodaux, La., personally evaluates the status of outstanding receivables at the 60-day stage. "Our clients include a diverse mix of public and private hospitals, nursing homes, private individuals, and corporations -- and each one operates according to different financial dynamics. At the 60-day stage, I try to figure out if a client is just a slow payer or might be in serious financial trouble."
Once Hession has flagged an overdue account as risky, he aims to convert the receivable into a promissory note of his own design. "I try to get the chief executive or hospital administrator to personally commit to a note that spells out the amount owed our corporation (including an interest charge), the date that payment will be due, a description of what the money is owed for, and a statement of what steps we will take if the note is not paid on time." He keeps a stack of fill-in-the-blank promissory notes in his files for easy use.
"Converting receivables to promissory notes takes bad debts and turns them into current obligations -- and banks like that," says Hession. "It also eliminates room for confusion, because instead of a whole mess of outstanding invoices, there's just one outstanding note, which has already been approved in advance by the person who signed it. And thanks to a clause we include, he's also agreed to pay our attorney or collection fees if the promissory note is defaulted on."
If the customers' chief executives or administrators are willing to commit their personal resources to guarantee payment -- and most are -- Hession gets what he views as a good indication of their own confidence about their company's future. But when they refuse to sign Hession's notes, he views it as a sure sign of trouble: "I'll turn that account over to a lawyer immediately, because it's the only other way of even possibly protecting our receivable."