Show Me the Money!

Collecting debt is no fun, but it’s got to be done to preserve precious profits

Recently on one of the COLE Publishing online discussion forums, the topic of conversation centered on what to do when customers refused to pay. One reader who had owned a septic pumping business, offered the following advice:

“… We used to imply that we would gladly give the customer a ‘return’ of his waste if he would rather not pay the bill. When they see your pumper truck rolling up … you hand them the bill and settle the matter right there. Now, the trick is that you cannot, under any circumstances, redeposit the sewage back in the system. But they don’t always know that.”

While this strategy seems a bit extreme, it would get the point across. The key message here, I think, is your business needs to find ways to make it clear to the slow payers and the no-payers that you mean business when it comes to collections.

Begin at the Beginning

Requiring a deposit of one-third to one-half of the total value of the contract upfront, or at least enough to cover materials used during the contract period, is a way of ensuring that at least some costs are covered should the customer come up short later on.

Another way to buy yourself a little security is to take the customer’s credit card information as a “deposit” and inform them you will process their payment through the credit card if other payment is not received within 30 days of its due date.

When a contract is complete you should be paid in full, so generally there’s no need to extend credit to consumers unless you deliver service over a long period and bill monthly or in stages. Some larger clients, however, may want some type of credit on a revolving-account basis, such as 30, 60, 90 or even 120 days after completion of the service. If you are extending credit to a new customer, safeguard yourself by conducting a credit check first.

To make sure you and your customers are on the same page when it comes to payment, before you do a minute of work for a customer, create a customer agreement that clearly states:

1. When payment is due. If one invoice a customer receives is due March 1 and another lacks a specific due date and money is tight, guess which the customer is going to pay first? Make sure yours is the one with the date.

2. How payment should be made. Who should the check be written to? What credit cards, if any, do you take?

3. What will happen if payment is not made on time? Is there a monetary penalty? Does interest accrue? At what interest rate?

Now at least you’ve got a document, signed by the customer, outlining terms. Those same terms should be repeated on the invoice when it is sent.

And send out invoices promptly. You can’t expect to be paid promptly if you don’t bill promptly.

Another effective addition to the invoice is a statement to the effect of: “Take X percent or X dollars off this bill if paid before … ” and then insert a date. People are looking to save money these days, if paying early means paying less, you may see a check quicker.

The Dreaded Collections Calls

The preceding suggestions may help ensure payment of future invoices, but what do you do with those already past due?

If you have delinquent customers, you have to get their attention before you have any hopes of getting their payment. If you are still providing service to them, stop before their debt gets any bigger. And while it’s no fun, it’s time to actively start making collections calls.

If your invoices state that payment is due in 30 days, you might not want to call on day 31. Being too demanding can annoy customers, possibly costing you a valuable client. But don’t wait until 60 or 90 days have passed.

The key to successful collections is keeping lines of communication open, and keeping the pressure on. Constant communication trains customers to pay bills promptly and leads to an efficient, professional relationship with them. Usually, a polite telephone call to ask about a late payment will get the ball rolling, or at least tell you when you can expect payment. If problems exist that need to be resolved before payment can be issued, your phone call will help start clearing them up. If your client is waiting for their customer to pay them, and you’ve successfully dealt with all parties before, that might be all you need to hear.

When making the collections call, be professional and use a pleasant, respectful tone of voice. But get to the point and clearly explain why you are calling. If you don’t receive payment in the agreed upon timeframe after an initial phone call, call again. Generally the longer a debt goes unpaid, the harder it is to collect. You can continue sending past-due notices and collection letters, but phone calls are harder to ignore.

Pay Them a Visit

If several phone calls fail to generate any response, try a personal visit. Set up an appointment ahead of time if you can. If this isn’t possible, leave a message stating what date and time you will be stopping by. Bring all the proper documentation (remember that customer agreement they signed?) so you can prove exactly what is owed. If it seems unlikely that you’ll get full payment at this point, try to arrange a payment plan with the customer. Make sure, however, that you put it in writing.

Outside Help

If the delinquent customer refuses to meet with you or won't commit to a payment plan, you may be facing a bad debt situation and need to take further action through an attorney or a collection agency. Compare the cost of using a collection agency to the cost of using your lawyer. You may be able to recover more of the money using one option or the other, depending on the total amount of the debt and the hourly rate or percentage the lawyer or agency charges.

The Bankrupt Customer

If a customer files for bankruptcy, you are legally prohibited from any further collection efforts. You will receive a bankruptcy notice with a “claims bar date,” which is the deadline for filing the paperwork required if you want to share in any distribution of funds. An attorney can answer any questions you have about bankruptcy proceedings, help you understand your options and decide on the best course of action.

Don’t assume you’ll never collect what is owed you when a customer declares bankruptcy. Many companies emerge from bankruptcy stronger than before and able to pay their bills, and many companies that are liquidated are able to pay creditors at least a portion of their debts.

While collections issues are frustrating for all involved, when the economy turns around, a current delinquent customer just might become one of your best customers.



Discussion

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