Running a small business successfully requires a healthy cash flow. So, when past due customer accounts receivables start piling up, it’s not something that can be lightly brushed aside. Those overdue bills can seriously compromise a business’ access to working capital and ultimately put the entire business in peril.
But when it comes to the debt collection process, small businesses are generally at a disadvantage compared to their bigger corporate counterparts who have the resources to employ dedicated, trained debt collection departments. Within smaller companies typically the role of “debt collector” either falls to the designated bookkeeper or to some other “lucky” worker who is already juggling several roles and who has limited debt collection training, savvy, or know-how.
One of the most important factors that will determine the success of a business’ debt collection efforts, is the level of knowledge and preparedness with which it approaches those efforts in the first place.
What follows is a brief guide for small businesses on the debt collection process that will both help to explain the various aspects of in-house debt collection as well as offer some tips and strategies.
When is a Debt Considered Seriously Overdue?
After three months (90 days), customer accounts take on a delinquent status. Business owners should keep in mind that the chances of recovering a debt in full drop significantly after those initial three months have passed. According to the Commercial Collection Agency Association (CCAA), the probability of recovering money from an account 90 or more days overdue drops to 73 percent. As more time goes by the likelihood of cashing in plummets to 57% after six months and to only 29% a year later.
Good Debt Collection Policies and Tools = Successful Debt Collection
Small business owners can significantly increase their chances of collecting on an overdue account by incorporating the following tips and strategies:
1. Record customer information accurately and clearly.
Maintaining clear, accurate, and up-to-date credit files and payment histories on each of your customers is a must. To help in the process, business owners should use a good accounting software program, such as QuickBooks. There are also several good free open source options that can be used, namely Microsoft Office Accounting Express, TurboCash, and GnuCash.
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2. Develop thorough and clear credit terms and conditions.
Clearly state the terms and conditions customers must abide by in order to receive credit from your company. Included in this written document should be a rundown of the actions that will be taken when accounts are seriously overdue. Make sure a copy of this policy is given to your customers the moment they establish a credit account, and is resent in the event of a delinquent bill.
3. Incorporate assertive collection tactics.
By stepping up your collection efforts from the beginning with a series of deliberate and assertive strategies, you will leave less wiggle room for your customers and ultimately protect your business’ bottom line. Such tactics typically include a combination of the following: running a credit check before extending credit, shortening the pay period, requiring a down payment, and requesting post-dated checks.
Assertive past due collection tactics should include:
Quick follow-up on an account as soon as it becomes overdue
Sending out a series of collection letters ranging in severity from a mere warning that an account is overdue to a final demand for payment before the matter is turned over to a third party
Closing or freezing the customer’s account
Attempting a series of collection phone calls
Requesting a face-to-face meeting
Attempting negotiation when there is a valid reason for nonpayment.
The bottom line is as long as the lines of communication are open, there is always some chance that you will reach an agreement and receive some or all of the money owed to you
4. Conduct an annual review and evaluation of the debt collection process.
Business owners should make sure that their collection process is in line with the current economic and/or market conditions. When the economy is in a downturn, businesses should be doing all they can to protect themselves against loss, but at the same time, they should also avoid alienating customers. Being assertive is a far cry from being aggressive. Business owners should think of ways to extend credit to customers who need, while at the same trying to minimize potential loss. Some examples of this were mentioned above namely, requiring a down payment or post-dated checks.
What Options are There for Collecting on Severely Past Due Accounts
In general, when an account has gone more than 90 days without payment, or when either communication attempts have been consistently ignored, promised payments are not met, or the person is unusually hostile, then it is time to seek outside assistance. There are basically three options for small business owners looking to recover some portion of their overdue customer debt: turn the matter over to a debt collection agency, take the indebted customer to small claims court, or hire an attorney. The following is a brief rundown of each option:
1. Using a debt collection agency to collect on past due accounts
The use of a debt collection agency in the recovery of overdue accounts is by and large the most popular option among small business owners- and with good reason. The main advantage to using a debt collection agency is that the agency’s employees take over the burden of sending collection letters, making calls, and negotiating payment. Business owners and their personnel are thus free to focus their energies where it matters the most- on running the business.
According to the Association of Credit and Collection Professionals (ACA), in a report entitled: The Value of Third-Party Debt Collection To The U.S. Economy in 2007, businesses can expect to see about a 20%-30% recovery on bad debt, and fees typically will range from about 25% to 30% percent of the amount collected.
2. Going to small claims court to recover unpaid customer debt
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Many small business owners use the threat of going to court as scare tactic to get debtors to pay up. Although several states have reported an increase in the number of claims being filed, the truth is that many of the claimants were unable to collect on their debts even after wining their case. This interesting statistic is due to the fact that a claimant who wins a case is solely responsible for collecting the funds afterwords. Bottom line with small claims court: often the hassle (the paper work, the pre-case preparation, having to personally go to court) and the cost (in fees) of going through the small claims process outweighs any benefits.
3. Hiring an attorney to recover past due accounts
The choice to use an attorney can end up being more effective than a collection agency, especially in cases where some legal action is a likely option. Most attorneys will charge a minimum service fee and/or set limits on the minimum outstanding bill they are willing to work for. If a business owner decides to take the debtor to court, the attorney’s fees will then be lumped together with any court-related fees and charges connected with the lawsuit.
Many business owners hire attorneys only after their collection agency failed to deliver results, because they assumed the collection agency would be the cheaper way to go. The truth is, however, that the debt collection process can often be complicated and drawn out. In many cases it may be simpler to just hire a lawyer and go to court. Business owners should keep in mind, however, that if they are not planning to take delinquent customers to court, then they don’t need to hire an attorney.
In short, by following the above mentioned tips and strategies on effective overdue debt collection, small business owners can greatly increase their chances of recovering part or all of the past due receivables.
© 2011 Adam Gottlieb The Frugal Entrepreneur All Rights Reserved
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