Last year it was skyrocketing input costs. This year it's dismal milk prices. Either way, many dairy producers are finding themselves struggling to cash-flow and meet their payment obligations.

“It's definitely a matter of concern for custom harvesters everywhere,” says Jon Orr, owner of Orrson Custom Farming in Apple Creek, OH.

“We've been hearing more and more stories about cutters having problems getting paid. Sometimes the numbers are almost unbelievable. In one case, a cutter was out several hundred thousand dollars. In another, the amount was over seven figures. I don't know of anybody in the business who can afford to take that kind of a hit.”

Coupled with his own personal experiences and observations over the past year or so, the various reports have convinced Orr it's time to take a closer look at his own billing and collection policies to determine if there are areas to shore up.

Currently, Orr invoices customers upon completion of any work he does for them, with payment due in 30 days. He offers discounts to customers who pay within 15 days of the initial invoice date. After 30 days, he rebills, tacking on a per-month interest charge until the bill is paid in full.

“At 35 days, we'll call the customer and ask what's up,” Orr reports. “Before I make the call, I remind myself to put my business face on and that it's not about making friends.”

He's willing to work with customers on interest-rate charges if he's notified that a payment might be slow in coming.

“Every business is likely to have a cash-flow crunch every once in a while,” he says. “If someone is having problems and lets us know about it in our preseason meeting, we'll look for a way to work with him. For example, we might back the interest rate off by half. On the other hand, if a person just doesn't pay on time without giving us any kind of advance notice, we'll hold to a pretty firm line on charging the full rate.”

By just about every measure, the current policy has worked for Orr. During the 13 years he's been in business, the longest he's had an accounts receivable open was eight months. “In that case, the people wouldn't answer their phone until we turned the matter over to an attorney,” he says. “It cost us $500 in legal fees, but we did get paid.”

Even so, Orr is considering working with an attorney to develop a formal written contract for use with all of his customers.

“In the past, we've always done business with a handshake. But when it comes right down to it, I think we were just lucky we didn't have more problems than we did. I really wish we could keep doing things the way we used to. But we're dealing in a different business environment now.”

Orr figures developing the contract could end up costing him $1,500-2,000 in attorney fees. “In the long run, though, it will be better for us and better for our customers,” he says. “It's just something we have to do.”

George Twohig, a Chilton, WI, attorney specializing in ag law, believes more custom operators should be using formal, written contracts to ensure they get paid in a timely fashion.

“Many custom operators shy away from using written contracts because they're afraid customers will take it as a signal the custom operator doesn't trust them,” says Twohig. “That's a misconception. The purpose of a contract is to clarify expectations and head off any misunderstandings that might result in disputes down the road.”

Among other things, he says, a well-written contract will address prices charged for services, payment scheduling and interest rates for unpaid balances. When you are concerned about the farmer's ability to pay, the contract can also contain provisions that offer you at least some protection as an unsecured creditor, i.e., a letter of credit from a lending institution, a milk assignment from the dairy's milk handler and/or notice of the so-called thresherman's lien.

If you're absolutely convinced customers will balk if they're asked to sign a contract, consider detailing your payment/credit policies on the price sheet or rate card you distribute to customers.

“It's not as good as a formal written contract as far as a court is concerned,” says Twohig. “But it will allow you to make the point that your customers were aware of your policies for payment because they received the price sheet. That could prove to be extremely important.”

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Other suggestions from Twohig:

  • Set up a good record-keeping system. Organizing accounts by age and reviewing them frequently will help you track evolving credit problems. Good record-keeping will also help you build a paper trail that will increase your chances of success if you end up in court. Among the documents to keep in a file for each customer are credit applications, contracts, financing statements, personal or third-party guarantees, invoices, account statements and correspondence.

    “At a minimum, the court is likely to require the original contract, proof of the amount owed (including interest charges and collection costs) and proof the debtor is in default,” he says.

  • Understand legal interest-rate limits. Twohig points out that many businesses routinely send invoices to customers assuming it's okay to arbitrarily charge any interest rate they choose on overdue balances.

    “Legally, that's not the way it works,” he says. “If the interest-rate charge has not been agreed to by both parties ahead of time, you're limited to charging the interest set by statute. In Wisconsin, for example, that rate is currently 5%.”

    For that reason, he recommends including a provision in the contract spelling out the details relating to interest charges.

    One suggestion for wording: “Interest will be charged at the rate of X% per month on any charges incurred by the customer under this contract which remain unpaid for X days or more following the scheduled payment dates.”

  • Avoid going to court, if possible. Launching a legal action to collect on overdue payments can be extremely expensive and time-consuming. Steps you can take before contacting an attorney include negotiating with the customer, mailing payment demand letters and sending out default notices.

“Start with the basic idea that most people are honest and want to pay their bills,” advises Twohig.