Maintaining a business in this economy is no cakewalk. One of the most significant issues businesses face is collecting
money for services or products provided. Delinquent payments are not only a hindrance, but they can damage a business’s reputation and financial stability. It is critical that businesses know how to handle past due accounts. In part one of our two-part series
on collecting debts, we’ll provide methods that could help your business recover money it’s rightfully owed.
Set Yourself Up
Develop a detailed credit policy that includes clear terms and conditions of extending credit, realistic payment terms, and information regarding the consequences of delayed or nonpayment. Put your policy in writing and disclose it to customers before transacting
business. Company staff should know the policy, be able to communicate it to your customers, and answer any questions that may arise.
Review invoices to make sure they make paying easy. Invoices should include the service/product purchased, transaction date, account or reference numbers, and the balance, due date, methods of payment accepted, payment terms, as well as your contact information.
Being proactive by contacting your customer after sending products or providing services to verify that everything is satisfactory, that invoices are correct, and to answer any questions, is a great customer service tool and promotes good business. You can
ask if the invoice has been paid and, if not, ask if there is any foreseeable reason why the invoice won’t be settled on time.
Planning is the Key
It is vital to establish an effective accounts receivable process. Maintain a log of accounts, amounts due, and due dates to keep track of the status of your transactions. Prioritize your delinquent accounts. A new customer paying late may be a higher risk
than a long-time customer that routinely delays payments, because you have no payment history on which to base your assessment. Also, larger balances may need to be given precedence over smaller amounts due to the risks involved.
Your plan should include: when to call customers for payment, when to send a past due letter, and options available if collection methods are unsuccessful. For example, you may choose to make your first call when the account is 1-5 days late, followed by
a reminder letter on day 6, and so forth. Review other business plans, consult with an accountant, or ask fellow business owners how they handle their collections in order to improve your recovery efforts.
When customers fail to make timely payments, prompt action needs to be taken. Time is not on your side and the longer the account stays delinquent, the slimmer your chances of collecting. It’s time to call. Before placing a call, have the client’s information
on hand, including invoices. Review the account to make sure no error is present. Rehearse what you will say and remember to always be polite but firm. Do not harass, insult, or threaten the debtor. This could land you in trouble if the debtor decides to sue
for unfair collection practices. Be ready to take notes on the conversation and any feedback the customer provides.
On the first call, remind the debtor when payment was due and ask when the amount will be made current. For example, you could say you notice that payment hasn’t been made and ask if there is a problem with the invoice/product/service that has caused them
to delay payment. This will engage the customer to talking and filling you in on what might be occurring. It could be a simple oversight that a friendly reminder call can resolve.
If you learn that the debtor is having financial difficulties, now is the time to consider alternate payment options, including offering to extend the due date, setting up a payment plan, or, if the circumstances are dire, offering a settlement agreement
to accept a lesser amount or forgiving the debt altogether. Before ending the call, summarize the conversation and follow up by putting the mutual agreement in writing.
Along with calling delinquent accounts, draft both a reminder letter and a final demand letter. Keep your letters firm and direct, yet polite and professional. Reminder letters should gradually put more pressure on the debtor to pay the balance due. The
first letter should convey the assumption that the delinquency matter is possibly an oversight on their part and offer a way to rectify the matter right away. Future reminders need to place more pressure on resolving the balance and need to be sent in a timely
manner (it’s recommended to send reminders either weekly or every 10 days). After a few reminders, it’s time to send the final demand letter. Include all the relevant information about the account, past collection efforts, and a notice of any further action
if the matter isn’t resolved within 10-15 days of the demand letter. Begin preparations to follow through on whatever plan of action you’ve decided to take next if it’s not settled. As a member of Business
Consumer Alliance, we will write a courtesy letter on your behalf to send to a debtor. This is a free service provided for our members that you can take advantage of by calling our Membership line at (800) 834-1119.
What to Do Now?
After all your collection methods are exhausted, you will need to decide how you wish to proceed. There are several options available to you, such as small claims court,
mediation/arbitration, writing the debt off as uncollectible, or turning the account over to a third-party collection agency. Collection agencies are often a welcome aid for a business
that has been unsuccessful at collecting on accounts and for businesses that don’t have the time or resources to conduct in-house collections. In our next issue of the Business Link, we will cover how to hire a collection agency. Stay tuned…