Part Two of this series, Establishing a Formal Credit Policy, discussed the importance of maintaining diligence when it comes to managing customer credit relationships and acting promptly to collect past-due receivables, because the odds of collecting them drop drastically the longer they remain outstanding.
Granted, collecting outstanding receivables can be a difficult and time-consuming chore. But the alternative is worse: Just writing off uncollected debt as a loss can severely crimp your cash flow and profitability.
Experts say there’s both an art and a science to collecting past-due receivables. Here are five steps that can help you avoid possibly alienating customers by taking a more aggressive collections stance — but still collect the money that’s owed to you.
1. Start with a courtesy call or e-mail. A friendly reminder call or e-mail during the first week after the account is past due is usually appropriate. This will also help you get a handle on why the payment is late. For example, was the invoice misplaced, or did the customer simply forget? Late payments can often be resolved quickly and easily this way, without conflict or hard feelings.
2. Consider a payment plan. If your call or e-mail reveals that the payment delay is due to cash flow problems, working out a payment plan may be in both your interests. After all, getting paid smaller amounts over time is better than not getting paid at all. The plan should require consecutive payments at least monthly and culminate with full payment of the debt within six months to a year.
The terms of the plan should be specified in writing and signed by both you and your customer. Caution: Never accept a check marked “payment in full” if it doesn’t cover the full payment. The Uniform Commercial Code states that acceptance of such a check relieves the customer from any obligation for further payment.
3. Send a past-due notice. This is the next step if neither of the first two gets any results. Your notice should include a letter clarifying the past-due status of the account and stating the total amount due and original due date.
Experts vary in their recommendations on how often past-due notices and “dunning” letters should be sent and how firm their language should be. Use your best judgment, based on your knowledge of the customer, the circumstances, and how much money is owed.
4. Send a final notice. If your first past-due notice fails to generate a response, your next step should be to send a final notice and letter. It should inform the customer that if payment is not received immediately, or perhaps within 7 days, the account will be referred to a collection agency or law firm.
5. Hire a professional. If you state that the account will be turned over to a collection professional, you must be willing to follow through if the customer ignores your final notice. Yes, there are risks to doing so, such as causing damage to your relationship and future business with the customer. Weigh this against the cost of writing off the debt — and also factor in whether you really want to continue doing business with a customer like this.
Collection agencies and law firms have a number of legal tools at their disposal to try to collect outstanding debts, including lawsuits and the attachment of bank accounts, assets, and wages. They are typically compensated based on a percentage of the amount collected. This percentage may be high, but collecting 50 percent of an outstanding debt is better than collecting nothing at all.
Fortunately, it’s fairly rare for things to go this far. Collecting past-due receivables can usually be done efficiently and without conflict well before the legal stage if you’re proactive and have specific collection procedures in place.