This article is Part One in a seven-part series on how to structure sales and what to do when your customer fails to pay you. Please subscribe to this blog by entering your email in the box on the left, or check back weekly for additional articles in the series. 

Know Your Customer

Before entering into a transaction, obtain the following information and documents that will 

help you determine if this is someone with whom you want to do business, and will help you set

the terms under which you want to do business.  It will also assist in the event collection of a

debt is necessary.


1. Financial statements, including an income statement, a cash flow statement and a balance


2. Dun & Bradstreet- this is a subscriber service that rates businesses.  

3. Trade references – these are references from other businesses with which your potential

customer does business.

4. Bank references- find out where your potential customer banks.  



Document Your Agreement

First, it’s important to be clear about the financial terms of your agreement. Agree before the transaction how your customer will pay you (cash, credit card, electronic transfer) and agree whether interest will be paid on accounts that are not paid when due.  The Ohio Supreme Court ruled unanimously in 2008 that interest on an open account, also called a “book account”, is limited to the statutory rate set forth in O.R.C. §1343.03(A) unless a written contract provides a different interest rate.  See, Minster Farmers Cooperative Exchange Company v. Myer and Minster Farmers Cooperative Exchange Company v. Dues117 Ohio St.3d 459 (2008).  The written contract must be a document that is signed by the customer, because the seller’s notation of interest on an invoice or an account statement not signed by the customer does not constitute a “written contract” under R.C. §1343.03(A).


Next, there are a few non-financial terms to be considered. Consider whether you want a security interest, which creates a lien on or claim to the goods you are selling or on other assets of the buyer.  If so, you will need a security agreement signed by the customer and a financing statement filed at the secretary of state (or equivalent office) in the state of your customer’s incorporation or formation.   


Guarantees of payment are a second non-financial term that must be considered as part of the doing business. Guarantees are usually obtained from the customer’s owner or owners, who will benefit from your doing business with the customer.    


Finally, as part of the non-financial terms, establish a reporting schedule for financial information. The debtor and guarantors should provide you with regular financial information, including signed tax returns and signed financial statements.


Keep in mind, if you are obtaining financial statements make sure they are signed and dated and,

if from an individual, determine if the individual has listed jointly- held assets, such as a residence owned with a spouse, and his or her percentage of ownership in jointly-held assets.


Once you have your reporting schedule and agreement in place, there are a few final pieces to consider:


1. Reserve inspection rights (meaning that you can inspect goods sold to your customer) and safekeeping (meaning that the customer agrees to keep goods safe, secured and insured as appropriate.)

2. Have your buyer consent that, in the event you have to bring suit to collect what is owed, your buyer consents to be sued in your home state.  This is also called also called a consent to jurisdiction. 

3. Consent to attorney fees- in the event you must bring suit to collect, the customer agrees that they will pay your reasonable attorney fees. 


Now that the agreement is in place, be sure to keep proper records regarding your customer, including copies of all instruments by which your customer pays you.  It may be relevant later on to have a copy of a check your customer used to pay you in the event you want to garnish their bank account.