The author is an attorney and the founding principal and shareholder at Krekeler Strother, S.C. in Madison, Wis. He devotes his practice to debtor-creditor and bankruptcy matters

Most businesses experience difficulties collecting accounts receivable. Each industry has its own particular problems. In this article, we will explore both common and unique problems facing those farm businesses that do field operations for others, including custom harvesters, custom planters, and manure haulers, when they collect their accounts receivable.

There are basically three types of customers when it comes to collecting agricultural accounts: Those who pay on time, those who pay late or sporadically, and those who are bad news — the ones who don’t pay or are difficult because that is who they are and how they do business.

Providing services without being paid in advance is a problem that lawyers can understand. There is nothing as valueless as a service already rendered. So custom operators must be prepared, vigilant, and proactive.

Gather information

The first step in getting paid is gathering information about your clients. Learn as much material information as possible. Doing so can help you decide whether to take the job. It can avoid conflicts and future problems and can better ensure payment. The more you know, the greater your profits.

Information that can be essential when it comes to evaluating customers and collecting accounts includes:

  • Names
  • Social Security numbers
  • Addresses
  • Bank accounts
  • Personal financial statements
  • Assets and liens

Some of this is public information and readily available, and many states have online access. In Wisconsin, we call this the Circuit Court Access Program (CCAP), and it will help you to see if there are active legal proceedings or prior judgments against prospective farmer customers.

You might also check your state’s Department of Financial Institutions (or similar entity) to review unified commercial code (UCC) financing statements. Knowing what liens are out there can be valuable.

And, of course, the internet now provides a wealth of information. Consider reviewing prospective customers on Facebook, LinkedIn, and other social media sites.

For large operators or large accounts, utilize a credit application with potential customers. An application is an easy way to gather the essential information described above. It can also set forth the terms for the account such as interest or late charges. It should also include a personal guaranty if the customer is an LLC (limited liability company) or corporation. If you would like a copy of a credit application we use in our practice, simply email me (my email address is listed at the end of this article).

Obtaining a copy of the farmer-client’s personal or business financial statement is also helpful. This should be easy to do; most banks require yearly statements, even when no new loan is being made or when an existing loan is current.

Tax returns are another segment of information that should be readily available. Everyone must do their tax returns.

Document the agreement

If the information is obtained and you are willing to take on the work, the next step is documentation of the arrangement. This includes contracts, personal guaranties, and liens.

Contracts: These should be in writing. Some of the items to document in contracts are:

  • Identify the customer (for example, person, LLC, corporation)
  • Payment schedule (bonus or incentive for payments)
  • Methods of payment (for example, acre versus hour)
  • Guarantor
  • Identification of collateral/granting of security interest
  • Responsibility for providing fuel, supplies, labor, and equipment
  • Anticipated schedule of work
  • How delays will be handled
  • Interest charges
  • Attorney’s fees and costs of collection

Interest: If you wish to charge interest, be sure to check any prohibitions or restrictions that may apply in your state. For example, here in Wisconsin, interest may properly be charged only if specific requirements are met.

Agricultural credit transactions are not subject to finance charges or fees unless the charge or fee is clearly disclosed in writing to the customer and is agreed to by the creditor and customer.

Collateral: Security interests are often the key to getting paid. You probably should not try to handle getting a lien without the help of your attorney. Security interests must be granted in writing. The lien must attach to the underlying asset, and it must be perfected to make it effective against third parties.

Depending upon the type of service being provided, you might be entitled to a priority lien as a production-money security interest. For example, under Wisconsin law, the provider can have a first and paramount lien on the crop (ahead of the farmer’s principal lender). To qualify, new value must be given to enable the farmer to produce crops.

Your state may have other liens that are available to protect you. In Wisconsin, custom harvesters may be entitled to a lien for threshing, husking, or baling. This lien is available for those who thresh grain; cut, shred, husk, or shell corn; and bale hay or straw. Check with your lawyer about the liens that may be available in your state.

Guaranties: If collateral is not available to secure the debt, perhaps the next best choice is a guaranty. These are often critical if the debtor is a limited liability company or a corporation.

When accepting a guaranty, go back to the information step. Try to ensure that the guarantor has sufficient income or assets to pay in the event of a default by the farmer. A shell company or an uncollectible individual is not particularly useful as a guarantor.

Take action

The likelihood for a successful collection often hinges on taking action early. There are many studies that show the odds for collection drops to 50 percent or less if the account becomes a year delinquent.

The actions custom operators should take fall into four categories:

  1. Communication is critical. Much of this was already dealt with in the information and documentation phase, but always maintain ongoing communication about problems and changes.

  2. Bill early and often. Timely billing and in a way that is understandable to the customer is just as important for custom operators as it is in any business.

  3. Manage accounts receivable. Follow up invoices promptly if they are not paid in a timely manner. A personal communication is probably best. Find out why the bill is not paid. Be specific if promises are made. Include a date of receipt and the amount to be paid regarding any payment promises.

  4. Consider collections. Discuss with your lawyer when to commence the suit. Always consider the costs and benefits when proceeding with litigation.

The information and documentation may have a major bearing on how you proceed with collection. Whether the farmer is collectible can influence and ultimately decide whether to proceed with the suit. You must understand that simply winning a lawsuit is not enough. The next steps will be to proceed with garnishment or attachment.

Also keep in mind that continued collection pressure could end up resulting in a bankruptcy filing by the farmer. That possibility should be discussed before a suit is even filed.

Custom operators often deal with large accounts. Not being paid by one or two of those customers could result in financial ruin for the entire year.

This article appeared in the August/September 2019 issue of Hay & Forage Grower on page 10.

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