How to Improve Your Business Collections Process
by Aaron Nelson on October 14, 2014
Fortunately for most companies, business collections do not have to be top priority. The majority of customers pay their bills on time in the normal course of business. In fact, based on historical data compiled by the Credit Research Foundation, delinquency generally averages between 7 and 9 days across all industries at any given time. Additionally, delinquency in excess of 91 days for all industries rarely surpasses 2 percent. Of course, the overall goal of a business is to create a customer who will have a long-term relationship with a company, therefore “scare-tactics” are usually not the best option when dealing with a customer who gets behind on their payments. The following are a few tips on how to improve your business collections process using a diplomatic approach.
Factors to Consider
Amount owed. Typically, a company can afford to devote more time and effort in business collections to large balances than it can to smaller ones.
Write offs. Keep in mind that a willingness to write off small balances can quickly add up over the course of a year.
Collection efforts. Unwillingness to change one’s opinion or chosen course of action can sometimes lead to holding onto the collection for too long.
Any of the above situations can lead to an unprofitable operation, either through direct credit losses or a more insidious rise in the costs of recovery. Possibly outsourcing of business collections based on dollars of exposure should be considered to control collection costs. Set up a system for determining which accounts to handle yourself and which accounts to turn over to a collection agency.
According to a study recently released by the Urban Institute, more than 35% of Americans have debts and unpaid bills that have been reported to collection agencies. Some studies indicate the longer an account is past due, the less your chances are of collecting it. So, when do you want to begin business collection efforts?
More Factors to Consider
Who the customer is. You’re probably not going to crack down on your mother-in-law if the payment is one day late, (or maybe you will). You also don’t want to crack down on a normally reliable customer who is one day late, one time. However, if the customer is chronically late with payments, you may want to treat it as overdue right away.
Size of the balance. If the balance of the bill is exceptionally large, you may want to treat it as past due immediately. Yet, if the balance due is rather small, you may not want to treat it as past due for several weeks. You’ll have to take into consideration whether or not your time is well-spent chasing after small accounts.
Methods of Collecting Debt
Develop a defined recovery campaign strategy. While not a business debt-collecting method, this is a critical process that should be done at each aging milestone. You and your recovery team–along with your slow-paying customers–should know the escalation pattern and specific actions to take on past-due accounts. This will prevent your slow-paying customers from continually thinking they can drift into the shadows during slower times. Furthermore, having the accounts flow regularly through your recovery campaign will help keep your team’s inventory fresh–avoiding a backlog of difficult customers.
Call the debtor to speak about the account. Always identify yourself using a civil tone, and state the reason for calling. Mention when the bill is/was due and ask when you can expect to receive a payment. It is important to remember that you should not harass the customer. Try to convey a desire to keep a positive relationship.
Call back if no payment is received within 15-30 days. Be sure to find out the reason for the delay in receiving the payment. Try to get at the reason for the non-payment in a non-judgmental and non-personal way, so that you can come up with a mutually agreeable solution for both parties.
Keep a record of all business contact. Keep track of the dates and times of your calls, letters, and any other communication, in case of legal action.
Negotiate with the debtor. If you feel it is your only chance to receive payment, ask what they can afford to pay, or offer them a discount, depending on the situation. Sometimes, if you know the debtor is avoiding payment, it may be less expensive to simply give a discount and never deal with them again.
Write a demand letter. The letter should address the account and also include past invoices, as well as references to past communications. Your letter should never be directly threatening, yet the language should reference harsher action, if they ignore their bill.
Turn the debt over to a professional service. If you determine the debtor is simply not going to pay, you may need to take some other action to try and force them to pay. This is why you would engage a debt recovery agency.
Even though the customer may be experiencing some difficulty in meeting payments, it is important to preserve goodwill while pressing for collection. If you collect your own debts, you need to be aware of laws that protect cusotmers from certain debt-collecting practices that are considered overly burdensome or unreasonable, such as the Fair Debt Collection Practices Act.
For further information on how to improve your collection process, or if you have any other questions or comments, please contact us today.