Improve Your Collections

Saturday, April 30th, 2016

What To Do When A Rental Customer Doesn’t Pay & Walks Away With Your Instrument

By Michael Raine

Sassi & Deverell

Every time a rental instrument goes out the door, your store is taking a risk. After all, you can’t run a credit check on every customer. (Well, you could, but it’s probably not worth it.) You trust that they’ll pay the rental fee and return that instrument. But we don’t live in a perfectly honest world and while it may be rare, every so often the money or the instrument disappear. It may even be an honest mistake, but if you’re trying to run a profitable business, you can’t just let it go.

“It’s a personal issue because somebody has taken something from you,” says Robin Sassi, owner of San Diego Music Studio. “I think 10 or 15 years ago, we would let the contract go cold because we’re thinking, ‘Well, they only owe $15’ and ‘Well, they only owe $30.’ Then it’s $45 and then it gets to $100 and by then, they’re a year behind and you know they’re not going to pay. It is not the amount of the monthly payment, it is the amount of the value of the instrument.”

After learning this hard lesson, Sassi, who is also a licenced attorney, decided it had to stop, and sometimes this means taking a hardline approach with delinquent customers that winds up in small claims court. She and her colleague Kimberly Deverell developed a detailed approach to improve their collections, which they shared in the aptly titled NAMM U session, Sure-Fire Ways to Improve Your Collections, at Summer NAMM 2015.

“From a business perspective, a lot of people when they have their music store and they’re investing in a rental fleet, most people don’t pay for the rental fleet in cash first and then collect the rent,” notes Sassi. “And even if you do, you don’t see your return on your investment for maybe a year or two. So when somebody takes the brand new instrument, which has happened to us – like a brand new saxophone rented for the first time and then it’s gone – it’s a big loss.”

To simultaneously prevent going to court but ensure you’re prepared if you do, Sassi stresses that her plan begins with the rental contract. “You actually have to look at it as a preventative measure. So when you’re making your contract, you’re going to put certain things in there that are going to help you to collect later on.”

For example, Sassi explains, in her contracts rental customers must list their place of employment. Customers will ask, “What does my job have to do with renting an instrument?” but the reason is two-fold. First, if they’ve missed a payment and aren’t answering emails or home phone calls, you can find them at work. Second, if it gets to the unfortunate step where you have taken them to small claims court and got a judgement and they’re still not paying, knowing their place of work makes the process of garnishing their wages to pay the debt easier.

“So the collections process really starts with having a good contract where you get enough information about the person,” says Sassi. “Also, sometimes when I’m renting an instrument and there is somebody I am getting a funny feeling about for whatever reason, call it instinct or whatever, I’ll start a personal conversation. Like, ‘So, where do you work? Where do your kids go to school?’ I’ll actually make notes on their contract after they leave because I’m thinking, ‘I might need that.’”

Like many rental programs, Sassi’s San Diego Music Studio has an automatic payment system in place where the monthly rental fee can automatically be charged to the customer’s credit card or withdrawn from an account. But cards get declined, and sometimes for reason beyond the customer’s control.

“As soon as it gets declined, we call day-of. It potentially is the start of the collection process there, but it could also be, ‘Hey, your credit was declined. Perhaps you got issued a new card or maybe your expiration date has changed. Give us a call or email.’ Nine times out of 10 they’ll call us back and give us an idea, but then there is that one time where we don’t hear back from them.” From there, a week-by-week and step-by-step process of communication begins, which may end in legal action (but hopefully doesn’t).

For the first four weeks after a missed payment, it’s a matter of consistent communication: week one, phone call; week two, phone call, letter, and email; week three, phone call and email; week four, phone call and email.

“The aggressiveness doesn’t come from the tone of the letters or phone calls; it comes from the persistency of the letters and phone calls. It’s always friendly in tone because we always take into account that anything you do or say can be used in court against you. So we just want to make sure that we always keep it professional as far as communication, but at the same time, when we talk to the person, we keep it personal; ‘Hey, my name is Robin. I don’t know if you remember me but three months ago I rented out an instrument to Joey, your son…’” explains Sassi.

“When we call them the second or third time, we’ve called people who owe us money for everything, not necessarily rentals, and begging works,” she laughs. “We’ll call them up and say, ‘Ee’re a small business and we really, really need you to make this payment. We don’t want to have to send it to collections or to have to take it to court. If you could just please call us back, we really need to get the payment.’ We plead with them because a lot of times when people are getting collections people calling them, it feels like a hostile and personal thing. They have to understand that we’re people and we’re not this big business or what have you. We’re people who depend on this for our income and to pay our employees and to pay for the instruments.” Again, in case things end up in small claims court, a record of every communication should be kept. It can be as simple as, “May 10, 2016 – called and left voicemail about payment.”

Week five is when Sassi begins the first formal legal step. Here, she sends a small claims packet to the delinquent customer, essentially warning them of her intention to bring the matter to small claims court. In Canada, the forms go by different names in each province, (e.g. a Plaintiff’s Claim form in Ontario) and can be downloaded from the province’s website for the attorney general. The plaintiff (store owner) can complete it and file it themselves without a lawyer and there are simple guidelines online. To potentially save the cost of filing the claim, Sassi says it’s smart to serve the notice to the defendant before filing with the court. About 50 per cent of the time, she says, “They look at all those official papers and go, ‘Crap, I need to pay’ and they’ll pay right away.”

For the other 50 per cent who don’t pay or at least respond to get a payment plan in place, then it’s time to build a case for small claims court. This isn’t difficult. It’s just a small packet that includes the contract, a timeline of all communication with the customer to show an effort was made in good faith to collect, printed emails and call log, and a short explanation of the amount owed. Remember, this isn’t about the amount of missed payments; it’s the cost of the instrument. Also, Sassi notes, “It’s the labour costs involved in trying to track it down, even just initially, just the letters that go out or the phone calls that you make or have an employee make. All of that needs to be calculated into the cost of the instrument.”

With all this in place, the court judgement is fairly cut and dry. In fact, Sassi says the court has ruled in her favour 100 per cent of the time. Her store, San Diego Music Studio, has also employed the services of a collections agency, which she says has significantly reduced the number of cold contracts that go to court and has even resulted in years-old cold contracts being paid.

Sassi has heard of other stores that see 30 per cent of their rental fleet walk away. “That is just not sustainable because that might be your profit margin,” she says. “You can’t always totally stop it; there’s never going to be a business where you’re not going to have anybody walk away with an instrument, but you can at least mitigate it.”

In summary, she says: “Have a good contract, communicate well, and document like crazy.”

Michael Raine is the Assistant Editor of Canadian Music Trade