High anxiety: suppliers and management firms discuss what to do and what not to do when it comes to putting clients into collections.

The number of apartment communities going into foreclosure is not the only thing rising in today's troubling economy. Past-due invoices are piling up in some owners' mailboxes. With shrinking occupancy rates and worsening credit for some, suppliers are becoming anxious about receiving payments

Some accounting department staff members are walking on egg shells, trying to salvage business relationships that are becoming fragile. More and more, the check simply is not in the mail. And it never will be because some payments aren't being made because of bankruptcy. In those cases, chasing bad debt could be worthless to suppliers.

Smaller-sized businesses are facing longer delays in collecting payments, according to an August analysis by REL Consultancy, a division of consulting firm Hackett Group, for the Wall Street Journal.

Businesses with less than $500 million in sales paid suppliers in an average 40.1 days, down 6.5 percent from 42.9 days, REL found. It also took them slightly longer to collect payments, or an average 58.9 days, versus 54.4 days one year earlier.

Companies with more than $5 billion in annual revenue took an average 55.8 days to pay suppliers and trade creditors in Q2 2009, up from 53.2 days one year earlier. They also collected faster on their bills, taking an average 41 days versus 41.9 days a year earlier, WSJ reported.

Units spoke with dozens of apartment industry suppliers spanning a variety of services and several third-party management firms and owners across the country about supplier relationships. Some voiced grave concern, swing they've never seen anything like it. Still others--those with more experience--offered advice and strategies about how to overcome the situation or stand poised to simply ride it out. Comments and anecdotes that follow were shared in anonymity.

'Never Seen Anything Like This'

"I've been working part-time in accounting for an owner for a long time," says one woman employed at a local carpet cleaning operation in Baltimore. "I used to spend two days a month collecting past-due invoices. Now, I'm working three or four days a week. I've never seen anything like this."

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In many cases, she says, patience on the part of both parties is needed more than a cash infusion. "You usually don't bother overdue customers until 60 days out so you don't seem like you are hassling them. But there's such a small window between being late and giving the client more time. That extra time sometimes is what they need to file for bankruptcy. They stall, giving reasons that sound legitimate, such as 'We're going through refinancing on our capital,' but what that often means is that they are getting their ducks in a row in order to file for bankruptcy. When that happens, you never get paid."

Another commented, "We're trying to minimize the damage by starting the collections process earlier. We're finding that hard-core tactics don't work. Today, you can't really put a customer into collections unless you are willing to end your business relationship with him."

One sales manager says she recently heard a conversation between two decision-makers who were discussing their boss (in this case, the owner of a property management company). The owner was making the company cancel all of their business with a supplier simply because that supplier had put them into collections over a couple of outstanding invoices. Even though the money owed was many months overdue, the supplier is now not getting paid and is without the business. "As a supplier who serves that same industry in their market, this is not a mistake I'm willing to go through, too," says the sales manager.

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Patience can pay off, says the manager of one resident screening service provider. "When we felt that the bills were taking too long to be paid, we just shut off our services to them. In one case, we didn't get paid for 10 months, but we maintained a cordial relationship with the customer in the meantime. And even though 10 months is well outside our expectations, they eventually paid us and came back and did business with us."

She said the toughest thing for suppliers during these times is deciding how nice to treat clients. "It's good to be nice to customers, but you should avoid being too nice," she says.

One third-party management firm's staff member says that suppliers must realize that department staff members don't always know all the details about why payments are delayed. As one notes, "We only know so much about what's going on behind the scenes. When collectors call, we can only promise payment based on what we know or what we've been told."

'Address' the Problem

A third-party management company is an agent hired to manage a property. If payments are delinquent, suing the management company will not help the supplier collect receivables. The property is owned by a separate entity and the supplier should sue the owner, not the management company. (Advice on how to identify owners appears later in this article.)

"I have offered to help many suppliers get paid by giving them the correct contact information," says one third-party management staff member. "However, some suppliers never get around to changing the address on the remittance because they were not able to gain adequate approval from a company to do so--and it's a company that no longer has employees. How crazy is that? I'm exhausted from continually having to tell them, 'As long as you keep mailing the invoice to this location, it won't get paid because our company wasn't the one that hired you for this service.'"

She says all she can promise to suppliers who keep sending invoices to the incorrect address is that the invoices will be thrown in the trash. "In one case, a major software firm repeatedly sent me invoices for upwards of $100,000 to cover licensing fees," she says. "This is not money that my company owes. Even though I explained this repeatedly, they sent the same invoice for 12 consecutive months."

She says communication breakdown also can occur when collections calls come from their third-party agencies that are based overseas. "These operators don't listen, follow directions or learn," she says. "We had a corporate account with [a major telecommunications company] and their collectors worked outside the United States. Some on the phone had no idea what I meant when I used common [finance-related] jargon."

Further, she pointed a finger at utility companies that are chasing past-due accounts of residents. She said some ask the third-party management company staff to retrieve private information.

"It's really crazy when it involves account passwords," she says. "[The utility company's representative] calls you and asks you to log onto a Web site, but I'm not privy to the passwords of previous residents. They then ask that you fax them the past invoices. Again, I have to tell them: I don't have them. We are just managing the property for the previous owner. The utility company is the one that sent them, so they should have them in their files."

Monitoring Payment History

The director for one major, national maintenance supplier says he's definitely seen an increase in the volume of delinquent payments over the past 12 months, particularly in the Southeast region markets such as Atlanta and Florida.

He says the key for suppliers in minimizing their losses on a community that goes into foreclosure is earlier detection. This can be done by recognizing changes in a company's payment history. "If you see a company that historically pays within terms start to extend payments 30 or 60 days later or carry a larger balance, you have to be concerned," he says.

He says he also relies on external sources such as an automated service offered by Dunn & Bradstreet that sends alerts when there are changes to a companies' financial standing or ability to pay.

"Depending on the severity of the situation, we might lower their credit limit, hold orders until past due balance is paid or decide to stop doing business with them altogether," he says.

He says the supplier also uses automation to send communications to customers, as well as to prompt his credit associates when to call. Such prompts are determined by the number of days the bill is past due.

"For larger customers, we are also relying on our credit associates who know the companies and the account history well enough to sense how to handle the situation," he says.

"We don't pursue balances owed to companies in bankruptcy," he adds. "We file a proof of claim to bankruptcy court and may recover a very small percentage of what was owed."

He says in cases of foreclosure, the chances of collecting are minimal. His company bases its decision to pursue the balance according to the size of debt. "You have to pursue the ownership of the property and, depending on the legal structure and whether or not there are any other assets, it may not be worth pursuing".

Suppliers' Advice: Avoiding Bad Debt

One carpet cleaning operator from South Carolina says suppliers visiting a community should open their eyes and ears and observe the management to determine if the ownership is financially stable.

"How are the grounds? What is the occupancy rate? How do its staff members behave?" he asks. "Communicate with other suppliers on the property. If you find that the property management company is not paying other vendors or they are sending partial payments to them, then we know it is time to end the relationship."

Some suppliers are resorting to stricter background checks and others are relying on collections agencies. The sales manager of a Louisville-based flooring company simply says, "We insist that customers complete credit applications. If approved, we begin doing business with them. After the job is ordered, we submit the invoice to the collections company and we receive payment in 10 business days. The collections company is then responsible for collecting from the management firm. They also decide what the credit limit will be. If the account becomes delinquent, they close their line of credit. This does cost us a percentage of sales to pay for the collections services, but we have zero exposure to non-payment."

One supplier's manager says, "We've been in business the past 20 years and we were never the kind of company that would invest a lot of time in background checks. But right now, you really do need to know who you are dealing with."

One service provider says he insists on having a signed contract--not simply a proposal--that states conditions and terms for the project, including requiring an appropriate deposit. "Typically, we set deposits based on the project length," he says. "We divide the payment into monthly installments. I make the distinction between proposals and contracts because I see many subcontractors still simply writing one-page proposals with a three-sentence paragraph stating they can charge interest if payments are late. That kind of language simply won't cut it in any financial environment, especially today's."

One apartment recruiter from the Southeast says the best way to keep delinquencies low is to get to know clients personally. She says she networks during local apartment association meetings and tries to stay visible in her market. "When an invoice falls behind, I can call my client personally since I have the relationship with them and ask when I can expect payment," she says.

Legal Options for Suppliers to Consider

Contractors have several options on how to pursue past-due invoices from apartment owners, according to an attorney who specializes in dealing with such claims for owner clients.

Suppliers or contractors who have not been paid for rendering services that apply to "fixing, repairing or adding to" a property may file a mechanic's lien against the owner. Mechanic's liens do not apply to services such as landscaping or general maintenance.

A mechanic's lien is a security interest in the title to property for the benefit of those who have supplied labor or materials that improve the property. The lien exists for both real property and personal property. In the realm of real property, it is called by various names, including, generically, construction lien. It is also called a materialman's lien or supplier's lien when referring to those supplying materials, a laborer's lien when referring to those supplying labor and a design professional's lien when referring to architects or designers who contribute to a work of improvement. Each state has its own laws regarding the creation and enforcement of these liens, but, overall, there are some similar elements among them.

Mechanic's liens are enforced exclusively through judicial foreclosure sales, i.e., through court proceedings similar to mortgage foreclosures. The court must determine whether the requirements of the statute have been met and, if so, the priority of the mechanic's lien being foreclosed relative to the other liens or encumbrances on the title. Once that is determined, the court will order the property sold and the proceeds of the sale applied to the liens in the order of their priority.

To collect, the suppliers must wait for the property to go into foreclosure. Many times, the amount of money the supplier is seeking is not worth the investment needed to hire an attorney.

For suppliers who simply wish to specifically target the owner, an involuntary bankruptcy petition may be filed. This is defined as financial failure that is legally and formally declared by petition of the debtor's creditors, and not by the debtor.

Secured creditors whose security interests survive the commencement of the case may look to the property that is the subject of their security interests, after obtaining permission from the court (in the form of relief from the automatic stay). Security interests created by what are called secured transactions are liens on the property of a debtor.

Unsecured creditors are generally divided into two classes: unsecured priority creditors and general unsecured creditors. Unsecured priority creditors are further subdivided into classes as described in the law. In some cases, the assets of the estate are insufficient to pay all priority unsecured creditors in full; in such cases, the general unsecured creditors receive nothing.

Because of the priority and rank-ordering feature of bankruptcy law, debtors sometimes improperly collude with others (who may be related to the debtor) to prefer them, by for example granting them security deposits in otherwise unpledged assets. For this reason, the bankruptcy trustee is permitted to reverse certain transactions of the debtor within period of time prior to the date of bankruptcy filing. The time period varies depending on the relationship of the parties to the debtor and the nature of the transaction.--P.B.

How To Get Paid: The Six-Step Plan

1. Check Credit. Who would give a total stranger $500 to $15,000 just because he or she has a business card or rents a space in a building? Pay attention to how organized companies run their businesses, how they maintain their properties and grounds and how professionally they handle you and their residents. Ask for credit references and check with your peers about them and with other organizations with which they do business.

2. Documentation. Make sure to get a signature, purchase order or something that would be presentable in court to prove that the work was completed and accepted. Explore having them sign a vendor agreement.

3. Persistent Communication. When an account begins to fall behind, get someone on the phone. Don't be pushy about it, but use language such as, "I was just calling on invoice XX. You have such good payment history that I just wanted to make sure the payments are in your system. Do you know when they are scheduled to be paid?" Document what is said and use it on the next call. "Hi, this is XX again. I had called on XX in reference to invoice? At that time, Tammy had said it was set to be processed on XX. Could you please check on that for me? Keep records of every notification and conversation that you have with them. This lets them know you are keeping track of correspondence in a professional, serious manner.

4. Have a "Breaking Point." Have a predetermined credit limit or aging limit and stick to it. If the property or company is in trouble, you don't want to be the last one working for them.

5. Use Honey, Not Vinegar. Don't be afraid to try negotiating with them and then find a win-win scenario. Following are strategies to take that do not involve legal action. These help maintain a good relationship with a customer, while at the same time they are reducing debt.

a. Before continuing services to them, require that they pay 50 percent of their outstanding balance.

b. Require a check on delivery (COD) for new services.

c. Make sure their payment each month exceeds that of any new services you are providing.

6. See You In Small Claims Court. If the debt is low enough to be brought to small claims court, you might have luck in obtaining a judgment in your favor. Remember, it might be necessary to hire someone to "collect" on the judgment.

--Mike Jacobsen, President Orcas Development, Portland, Ore.

Paul R. Bergeron III is NAA's Director of Communications. He can be reached at 703/797-0606 or [e-mail].