Collection Strategies for a Sluggish Economy

Most business owners are feeling the credit crunch that is a result of the current economic crisis across the country.  It is rare that I speak with a business owner who is not dealing with customers who are seeking to extend their credit terms, or are outside of them altogether. 

Some companies have their own difficulty with their payables due to the slow payments received from customers.  The hesitance of lenders to extend operating lines of credit to many businesses during this period further compounds the problems that small businesses face when trying to cash flow their operations.  This may result in missed opportunities for growth or expansion due to the fact that cash is at a premium.

It is easy to reiterate the situation that many business owners are facing today.  What is difficult is identifying solutions.  However, there are some strategies that can be employed to assist a business in minimizing receivable issues in the first place, and maximizing their success in collecting them in the event it becomes necessary. 

A Brief Word about Security

Depending on your type of business, there may be certain opportunities to retain a security interest against your customer’s assets in order to ensure payment.  Security in a debtor’s property grants the creditor an interest in an asset of the debtor until the payment is received. 

Formal security interests can take various forms, including but not limited to purchase money security interests in goods purchased on credit, or mechanics’ liens against assets where repairs or improvements were made to the asset.  Even where a creditor does not have the ability to retain a formal interest authorized by law, there may be informal alternatives to consider, such as taking deposits to cover a bulk of the work, or requiring payment at some point prior to the completion of the services, or delivery of the goods to the debtor.

Having a security interest is a valuable tool when dealing with a debtor in significant financial distress.  However, it is not practical to retain a security interest sufficient to protect the creditor in every foreseeable situation, and as such, the tips included in this article are focused on collecting unsecured obligations, which is the reality facing a vast majority of business owners today.

1.  Establish consequences for Late Payments. 

If your purchase agreement or invoice merely states a price and the payment terms, it is easy for a customer in a cash crunch to let it sit at the bottom of the stack under credit cards and other bills that have significant consequences for late payment.  At the time you are discussing pricing with the customer you should advise them of your late payment policy.  A simple monthly interest calculation or a flat fee of 10-15% will typically suffice.  Alternatively, you can offer a discount for bills paid early or on time. 

If nothing else, addressing this up front with the customer will give you some insight into the customer’s payment habits.  A customer preoccupied with negotiating the terms or penalties may have some experience in not paying their bills on time.  Don’t feel compelled to limit this strategy to new customers, either. 

Implementing a company-wide policy regarding late payments may prove to be worthwhile, even though it may be initially resisted by some long term customers.  If the specific circumstances warrant it, you can always waive the penalties for such customers experiencing temporary setbacks.  In so doing, you are likely to gain more goodwill than you lost when implementing the policy in the first place.

2.  Develop Standard Procedures for Collection Efforts on Past Due Bills. 

Once the bills have gone out it is easy to forget about them and hope that the money will come rolling in.  But how do you address those customers who are not paying, or are taking their time paying for your goods or services?  Take some time to develop a straight forward and informal collection letter that can be used with your past due customer that indicates the amount due and the number of days the balance has been outstanding. 

Once you have prepared a draft letter, appoint someone in your office to prepare and send letters out to all customers who are over 30 days past due on a monthly (or more frequent) basis.  This simple step will avoid the common excuse that a customer forgot about the bill. 

For any in-house collections such as these, it is generally a good idea to remain cordial in order to preserve future opportunities with the customer.  This letter can be treated as a simple reminder to the customer of the payment terms, and the applicable late charges that will continue to accrue if payment is not made.  If the lack of payment was an honest mistake, you will find customers are eager to make it right.  However, this letter can also be a useful tool in staying ahead of the curve in identifying potential disputes or claims that a disgruntled customer may have.  The earlier such problems are identified and communicated, the more likely they are to be resolved informally, without the dispute escalating to future legal action.

3.  Formal Collection Proceedings

If the customer has ignored your payment reminders and has not communicated with you regarding a possible dispute (or if the customer takes an unreasonable position in communicating a dispute), then it is likely time to consult a professional regarding formal collections. 

You will want to identify the amounts due that are most likely to be collected before consulting a professional.  Although most undisputed invoices will be able to be turned into a judgment against the debtor, if the debtor does not have sufficient assets to satisfy the judgment, then it is not that valuable to you.  Likewise, the older a receivable is the less likely you will be able to collect it.  Therefore, if you can establish an ongoing relationship with an attorney to assist you in your collection efforts, you may enjoy better results than if you take all of your bad debts to an attorney annually and hope they will be able to collect some of them. 

If there are a number of receivables that you believe will be difficult to collect, you may elect to forward those to a collection firm that works on commissions.  However, you should be very particular in who you work with.  There are a number of reputable firms that do this, but there are perhaps a greater number of firms that utilize unethical and/or illegal collection practices and could potentially put your company in worse shape than if the debt wasn’t collected.

Finally, beware of the counterclaim.  This is good advice whenever you are considering legal action.  If a customer has advised you of a valid dispute regarding the good or service you provided, they may be eager for you to take them to court to try and collect on their bill, as it presents them with an opportunity to file a claim against you regarding their dispute.  Therefore, if their dispute is valid, you would be well advised to seek a release from them for their claim, in exchange for you releasing them from their obligation to pay.  If this is not feasible, then perhaps you should consider not filing the claim and instead wait to see if they file a claim first.  If they do, you can counterclaim for the balance due.

Once you have sorted through the collectible claims and met with an attorney, there are a number of different approaches that could be used to collect the debt.  Stay tuned for future entries further outlining these techniques.