During an economic downturn, collecting accounts receivable (A/R) becomes more important than ever, but even more challenging as customers experience cash flow problems of their own.
While managing receivables is one of the most critical aspects for keeping a business healthy, most companies make common, costly mistakes. Some mistakes include:
- Waiting too long to take action. The more delinquent an account becomes the less likely your internal efforts will be successful. However, credit managers will continue work on accounts that have not made payments in more than 60 days, due to a “hero mentality”. They are convinced they will collect the money themselves no matter how long it takes.
- Being reactive instead of proactive. Companies have a tendency to wait until they hear that someone is in trouble and/or until the phone number is disconnected before taking action.
- Allowing customers to exceed their credit limit. A credit limit is set for a reason and therefore allowing a company to have more credit than they can cover typically results in an A/R nightmare.
- Not holding the customer/debtor accountable. Sending out demand letters or making verbal demands with deadlines for payments and then not holding debtor accountable. Successful collections are about perception and accountability.
Avoiding these mistakes
First, implement stronger internal procedures and be consistent with every account. Talk to an expert such as a commercial collection agency or attorney and ask them to review your credit application and personal guarantee to make sure it will stand up in court if necessary.
Next, work with the expert to set up a collections schedule and stick with it on every account. Ask them to provide sample collection letters and scripts for phone calls.
When setting up a new account make sure a credit application is filled out completely and a personal guarantee is signed. Run personal credit and asset reports, recognizing the way a person runs their personal affairs is reflective of how they operate their business.
Don’t wait for the rumors. Begin re-evaluating the account if a company starts making smaller payments or orders become more infrequent. Request the company fills out a new credit application and if they refuse or the information does not match, take action. If you wait until they file bankruptcy to take action, you will just be another creditor in line and chances are you will not receive money.
Finally, re-evaluate credit limits on a regular basis and proactively manage your accounts. Circumstances change and just because a company qualified for a certain amount five years ago does not mean their limit should be that high today.
Determining the next steps when an account becomes delinquent
Don’t wait to take action. Focus internal efforts on accounts no more than 30-days delinquent rather than older accounts. At 60-days delinquent place the account on credit hold immediately.
If you do not have a personal liability on the customer, ask them to sign a promissory note on the delinquent balance. Should the customer refuse to sign the note or if no payment is forthcoming, it is time to outsource to a third party for assistance.
Working with a commercial collections agency is the best first-step, rather than first hiring an attorney. Legal action takes time and time is the enemy of uncollectible debt. It’s not what the company has today but what they will have in 12 months. As we all know, there is a big percentage that will not be in business in one year.
Here are tips for finding a reputable agency:
· Look for members of the Better Business Bureau and the International Association of Commercial Collectors.
· Be sure they work on a contingency basis. If you must pay up front to start your claim, there is not as much motivation to collect your money since they have already been paid.
· Work only with Credit Reporting Agencies that report to all three bureaus, as agencies must go through an onsite verification process.
· Make sure the agency is licensed and bonded in all states that require it. Currently, it’s required in 21 states.
· Determine if the agency has a legal forwarding program. In the event a suit is a viable option, be sure the agency uses attorneys who are accredited members of a law list and are bonded for at least $1 million.
· Consider the level of professionalism which is very important if you choose to do business with the debtor in the future. The agency should record every phone call and save all correspondence in case there is a problem.
· If you are a member of a buying group or cooperative, determine if they endorse a collection agency. Chances are the group has done a lot of due diligence for you and has negotiated lower rates.
· Be sure the agency understands your customer’s profile. Find an agency that specializes in your industry.
Jerry Smith is president of AIP Solutions, a commercial collection agency who specialized in the HVACR and plumbing industries. AIP Solutions, a HARDI Member in Scottsdale, Ariz., also offers credit card processing and check guarantee. Jerry Smith can be reached at [email protected] or 866.460.7898, ext. 101.