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6 Ways firms can solve collection problems
01-06-2008
6 Ways Firms Can Solve Collection Problems
For small businesses, friendliness and firmness go hand in hand
No small business works in a vacuum. Many industries claim to be recessionproof, but ripples from the broader economy are hard to dodge. Take the issue of your accounts receivable: The same amount of debt owed by your customers might seem manageable when the economy is perking along but become a problem when an economic slowdown is cutting into your customers' incomes and making it hard for them to cough up the cash.
If your cash flow is already slow, the failure to collect money owed can be a big issue. "Learning to collect those accounts receivable quickly and efficiently may be the difference between survival and failure," says Bill Bartmann, former CEO of one of the nation's biggest debt-collection companies. Yet a small-business owner who already has to be a jack-of-all-trades on the job may know little about collecting. Here are a few tips to get you started.
1. Give out as little credit as possible. The most effective way to avoid having problems collecting debt is not to have many accounts receivable to worry about in the first place. Any credit that a small-business owner extends carries risk, and that risk is heightened when the economy is sluggish. "You're going to get a lot more bad debts in a tanking economy," says Chris Kelleher, a St. Louis attorney who advises small businesses. "If it's possible for you to not extend credit, or extend the minimum amount to make a sale, you're miles ahead."
But won't you risk losing customers if you're tight with credit? There are two ways around that. First, you can set up a system of deposits for customers who are wary of paying for your services in full. Write up a schedule of payments that can be made over time, or have the customer pay you as you accomplish certain milestones of the job. That way, if something goes awry, the costs you've sunk into the project are covered. Second, if the customer does not like that compromise, you should ask yourself if you really want that person as a customer. "Anyone who turns that down has waved a red flag saying he doesn't have any money," Bartmann says. "Wouldn't you rather let your competitor have that customer?"
2. If you're going to lend money, think like a banker. No bank would give out money without doing some homework on the borrower. Neither should any small business that is going to play the lending game. But this rule is often broken, says Michelle Dunn, author of The Ultimate Credit and Collections Handbook. When she ran her own collection agency, Dunn saw that most of her small-business clients "were very lax with their credit policies."
She recommends making all customers fill out a credit application and having them update it every year, because financial situations can change quickly, especially when the overall economy is in flux. Basic credit applications can be found at office-supply stores. For a customer who is going to owe you more, you should require more paperwork, just as a banker would. For advice on what information to require, Kelleher suggests, "Ask your bank what they do."
3. Time is of the essence. "You can go broke in a business that has a lot of accounts receivable with no cash," Kelleher notes. Have a system for following up on invoices. "Give a call the minute that account is due," Bartmann says. If you're low on cash and need payment without delay, a phone call can often get results faster than an E-mail or letter because it is harder to ignore, but you don't need to be aggressive. Make it a "friendly but firm" reminder, he recommends. If you have to make several phone calls, become increasingly firm.
What if the phone calls don't work? Showing up in person can shock a customer into action. "It's easy to throw away a letter or hang up the phone. It's harder to deal with owing money when the person is standing right there," Dunn says.
4. Make sure you have the facts in front of you. Before you pick up the phone, have all the information about the customer's account in front of you and make sure you are familiar with it to avoid getting the run-around. The customer might claim that he or she has not received your product or service, or otherwise try to steer the conversation in another direction. "You need to have a comeback right away," Dunn says. If you are well informed, it's much easier to maintain control.
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Credit & Collections
The reality in commercial trade credit is that collections is that last thing one should be concerned with, assuming all has been done prior to the extension of credit. I call this “putting the collection effort upfront.” There are many ways a company or firm can improve their cash flow while at the same time keeping the customer satisfied and product or services moving and or / sold.
1. Obtain a signed Credit Agreement (application) - The first step in selling product and improving your ability to collect later (should you reach such a point) is to have your customer complete and sign a credit application. Not only does the application provide you with all the information you need and who your contacts are, it will spell out the terms and conditions as well as the ability to asses late fees, charge for collection costs, legal fees and more. These little safe guards are what I call “soft-hammers” that can be used at a later time, should it be necessary.
So, your first step is obtaining a completed and signed credit agreement; I say agreement as if it is written and executed correctly, it can become a binding contract.
2. Run Your Credit Investigation- This is probably one of the greatest errors that companies make and that is they fail to check out their customers credit history. And for the record, checking references is absolutely useless because it is pretty much a given that no one is going to give you a reference they are paying slowly. Besides that, references do not indicate liens, litigation, unpaid taxes, collections and so forth.
By taking the steps as I just explained, you have already resolved a good portion of your collection efforts, without even having to make a phone call.
3. Give As much as Their Credit Warrants- In the article, the readers are instructed to “give as little credit as possible.” If your customer has taken the time to complete the application, and you have taken the time to run an investigation, why would you not work to create a positive response to a customer who could very likely end up being your largest customer? My approach has always been that if a customer has placed an order for let’s say $5,000.00, and the report comes back with a high score and positive information, I am sending him/her a letter thanking them for their order and letting them know that “by the way, their credit availability is $20,000.00”. The reasons for this are:
a. I want them to know that it is easy to do business with us, perhaps easier than my competition
b. I want them to place more orders with us
c. I want them to know that I trust them and that I am about building a positive business relationship with them
Done properly, the credit function can be an extension of the sales department and will eliminate and / or reduce the collection efforts of your company. There is of course much more to the art and skill of credit management, but you can have peace of mind of solid sales, good customer relations, and strong cash flow without a lot of collections or bad debt.
Prudent credit decisions and effectively run credit management can and will produce the best possible results for a company. Companies need to look more to their credit departments as sales enabler, not the “sales prevention department.” Beyond my personal success in credit management, we have helped many more companies achieve remarkable results after implementing the right procedures, guidelines, and approach.