Tired of Old Accounts Receivable? "Swiping" Your Fees is an Option
by Doug McQuiston
How old is your oldest A.R.? 60 days? 90 days? 120 days? Law practice management studies tell us that the longer your bill remains unpaid, the less likely it is to ever be paid. After 120 days, odds are it’s turning into nothing more than a bad debt.
Even if you do manage to strip off the cobwebs and collect an old bill, how much income do you lose every year discounting your oldest bills, "just to get something?" Isn’t it time to figure out how to fix this?
Forty percent of private practitioners in Colorado, from firms of all sizes, have decided to attack their A.R. problems by "outsourcing" their clients’ debt to their credit card issuers, according to the 2008 CBA Economics of Law Practice Survey. (This survey is a must-read, see www.cobar.org, under "For Lawyers"). The number of lawyers accepting plastic is expected to continue to grow, particularly among smaller firms.
"Swiping" your fees can eliminate the inherent conflict in being your clients’ advocate while also being their creditor. Do you enjoy talking with your clients about an overdue bill? How do you think your clients feel? Offering your client the option to pay your fees via credit card gets your firm out of the "banking" business, and lets you focus on giving top-quality legal service and positive client communication, instead of carping about an overdue bill.
Even in our current downturned economy (maybe especially so), many clients will appreciate the convenience of a credit card payment option. Some even prefer it, because they can earn frequent flyer miles or other rebates, or regulate their own cash flow, by using their cards.
The credit card payment option also will mean you won’t have to discount an old bill "just to get something." This can be like finding quarters under the couch cushions — by not having to discount to get paid, you’ll discover substantial "new" income, while still getting home in time for your kids’ soccer games.
If it is set up correctly, the credit card option gets your bill paid in days, not months. The issuing bank becomes the creditor. Collections become, for the most part, their concern, not yours.
However, one exception to keep in mind is the occasional possibility of a "challenge" of the charge by the client. If that occurs, the bank can withdraw the challenged amount, pending the resolution of the dispute. This process raises ethical questions if the charged, disputed amount was placed into a trust account. Ethical rules prohibit third-party access to any trust account, and such a debit can affect your other clients’ dollars held in the trust account. Some challenges are unfounded, however. Refer to credit card companies’ law firm merchant accounts at http://www.cobar.org/index.cfm/ID/1348/arap/Best-Practices-for-Credit-Card-Acceptance/.
By not having to discount to get paid, you'll discover substantial
So, are there any other potential pitfalls? Some careful planning up front will avoid serious headaches down the road. For starters, read CBA Ethics Committee Formal Opinion 99, "Use of Credit Cards to Pay for Legal Services," from May 10, 1997. (Search "credit card" at www.cobar.org.) The American Bar Association also has a few articles on the subject that are worth a read.
Swiping the card for earned fees and flat fees, for example, is relatively simple. Because you have earned the fee, the charge can be paid directly into your firm’s operating account (the "merchant bank" account) by the client’s card’s "issuing bank."
Swiping the card for retainers, though, is considerably more complicated. The merchant bank agreement you’ll sign to set up credit card payment acceptance might contain language that precludes charging for "services not yet rendered." Other snares can crop up unexpectedly, like federal Fair Debt Collection Practices Act problems involving Regulation Z, which has to do with disclosure and management of the swiped retainer, and a collection of your fees as you earn them. Research any ethical pitfalls regarding retainer fees and your trust account.
Confidentiality regarding the nature of the charge should also be researched and addressed. Credit card rules require some description of what each charge is for. You’ll want to be careful not to disclose any confidential information in the credit card billing statements and process, such as the nature of the legal work. A simple "services rendered and expenses incurred" statement will help steer clear of any confidentiality issues.
Also, you’ll want to budget and account for the credit card company’s fees, which typically range from two to four percent of the transaction.
You will, of course, also want to include detailed language in your engagement and fee agreement that spells out the credit card payment option. Explain to the client how you will charge, what your fees are, etc. If your work will require monthly billing, spell out in detail the method used to charge the account each month for earned fees. If you do plan to swipe the card for retainers, you might consider language in your engagement and fee agreement allowing you to charge the card periodically to "top off" the retainer if needed. Needless to say, you will also want to have confidence that the card your client offers for payment is in fact their card. It’s frighteningly easy to fall victim to credit card fraud. Establish a credit card security policy within the office and stick to it.
Only you and your partners can decide whether it’s a viable option for your practice to "swipe" your fees on clients’ credit cards. With careful planning and detailed communication with your clients and your bank, you can reduce the age of your A.R.s from months to days, improve your cash flow and practice efficiency, improve your client relations and give you more time to focus on your clients’ problems, not their overdue bills.