When It Comes to Credit, Attention to Detail Paramount

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Lawyers are generally very good at dotting their i's and crossing their t's. In other words, they are detail-oriented.

Attorneys need to capitalize on that attribute when creating a credit policy.

When it comes to your firm's credit application, there are three basic components to setting a credit policy:

  1. Approval
  2. Determining credit limits
  3. Setting interest rates

If you evaluate your client's worthiness for credit at the beginning, you'll save a great deal of time and money later on. You can check customers through LexisNexis, Dun & Bradstreet, the National Association of Credit Managers, industry trade reports and/or credit-rating agencies.

You can even ask clients to bring in their own credit report or charge a non-refundable application fee, which you would use to run a credit check. Because this will become the cost of doing business with every client, you may consider building the cost into your fee structure.

However you decide to handle the specifics in your firm, be sure to use at least two or more sources of information. One source is hardly doing proper due diligence when it comes to creditworthiness. Two or three different sources are more likely to give you a complete picture of the client's business.

And recheck the client's credit every year. In fact, try to visit the client's business at least once a year, perhaps around the time you rerun the credit check. A visual appraisal of the business may tell you even more than the check.

When setting a credit limit, one thing is paramount: Stick to it. In larger firms, the rainmakers often work special favors for their best clients, causing the firm to bend the rules. But if you genuinely want clients to pay their bills on time, make few or no exceptions.

A decision you make in the middle of some fevered frenzy of work for the client may make it impossible for you to walk away from the client later on, either because the court may not allow it with a trial date imminent, or because you just don't want to.

As I like to continually remind myself, involuntary servitude beings with the failure to set appropriate credit limits.

It seems counterintuitive to set interest rates for clients who are slow to pay. After all, if the clients could pay, they would. Moreover, if you cannot convince clients to pay on time, you certainly can't convince them to pay the interest on the bill they couldn't afford.

For those reasons, charging interest may be more of a bookkeeping headache than it is worth. But it also could serve as a deterrent to nonpayment. If you intend to charge interest, include that information on your credit application in your fee agreement. Check the rules in your jurisdiction as to the amount of interest you may charge; rates are often different for individual and corporate clients.

We live in a world of borrowing, and firms that flatly refuse to extend credit do so at their peril. But resist the urge to issue credit as a sales tool. Credit that you extend when business is slow is credit you will regret later.

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