As a credit grantor, you should be aware of some basic principals when extending credit to clients:
• Extending credit carries an unavoidable element of risk. You will experience cash flow loss through debt regardless how carefully you screen and babysit your potential and current client base. Unfortunately is a "Fact Of Life" for Financial Executives.
• There are fundamental policies that you MUST create, implement and consistently enforce to achieve your most successful Cash Flow profit. Of course No Policy ensures No Risk involved, however if enforced, the risk can and will be minimal.
• Both parties must have complete definition of all credit terms and conditions involved within the credit agreement. The agreement MUST be signed by BOTH parties. Proper One-on-One review with each new client agreement is not only necessary, it is also crucial in the outcome.
• Consistent and diligent follow up of every account should be documented and verified.
• "Financial Check Up's" should be completed on new, current, and long term clients regularly.
• Accounts should NEVER move from one aging bucket to the next without being placed with a third party collections firm UNLESS extenuating circumstances or payment arrangements agreed upon with signatures are in place
• Make Your No Mean No. Once terms are broken and you agree to a new payment arrangement, DO NOT revise again. Your Yes MUST mean Yes and Your NO Must mean NO. If not, there will be no respect, or adherence to any policies by your customers and your company and payments will never be a priority.
As an extender of credit, your business is one of many that allow organizations to use goods and services immediately and pay for them later. Meanwhile, they usually make immediate profit from your goods and services. Therefore there should be no reason for your clients to break terms. While extending credit increases sales, it also puts you at risk. "Being Paper Rich and Cash Poor, is never proactive".
Most businesses average .5 to 1% of their total sales volume annually. If your debt is estimated above 1%, immediate restructuring internally of your Credit and Collections process is advisable.
When Do Accounts Reach the Terminology…. Bad Debt
We will break this down very simply. Bad is used as an adjective to describe a negative action or emotion. The opposite of something being positive or profitable. Debt is money that is owed, or a balance that is unpaid, delinquent or past terms. So, technically, bad debt is any amount of money that is owed to your company, which is not paid exactly as agreed upon in your initial credit term agreement.
Why financial executives seem to believe that debt is not bad until it surpasses 120 days, is beyond me. However I would like to inject a short statistic here. Did you know that with each aging bucket, probability of payment declines by 13%. So, again, DEBT is NOT like fine wine…IT Does NOT get better with age!
Reducing Bad Debt
Now, your internal written policy including detailed and scheduled procedures is pertinent at this point. If not in place, or not enforced, accounts can quickly go from "collectable" to "write off" in a matter of weeks. Again ensure you have a strong policy with definitive process implemented actively and ensure that it is enforced without exception, unless signed off by YOU and only in extenuating circumstances.
If your internal collections department has completed:
• First courtesy call thanking customer for business and reiterating invoice due date prior to due date (average day 25 )
• USPS Late Payment Notice ( average day 35 )
• Completed a Second Call requesting payment ( average 40)
• Emailed/faxed a second copy of invoice ( average day 45)
• Certified Mail/Email or Faxed a Final Demand Notice mentioning third party involvement if payment is not received by demand date ( average day 50 )
A successful in-house policy must:
• be tough yet flexible
• have specific guidelines of action
• contain self-evaluation
• be consistently enforced
Never move backward or repeat a step in the hope of salvaging an account.
When to Hire a Professional Collector
As an account ages, the chances of collecting on it decreases dramatically as we discussed previously in this article. It's expensive to carry accounts that you will not be able to collect using the methods at your disposal. It's often a better use of your company's time and resources to concentrate on other aspects of your business. A Professional collection service can assist you in collecting accounts that remain delinquent. Collectors have a vast knowledge of collection techniques, technology and compliance issues. Using a professional collection service will save time and likely yield better results.
Look for the following signs that you may need to work with a collection service:
1. A new customer does not respond to the first reselling notices. For some unknown reason, the client will not or cannot pay. Potential losses could be kept to a minimum by prompt referral to a collection service.
2. Payment terms fail. In some cases irresponsible customers pay when and if they want to. This group is responsible for 20 to 48% of the cost of collections. Cost and potential losses are reduced by quick action.
3. The Customer begins making sudden invalid disputes to avoid payments. . Such clients are often better handled by collection specialists.
4. The customer avoids and ignores your internal collections process ( calls, voicemails, notices, and demand correspondence) Without professional help, these accounts are usually written off as total losses.
5. Delinquency coexists with negative or low profit margins within the specific customers industry.
6. Obvious financial irresponsibility is apparent. If YOUR competition begins contacting you and requesting credit references, the probability of in-house collections is virtually impossible,
Working with a Third Party Collection Firm
Always research and compare third party collection firms.
• Be sure to have them submit their business license, certification and client bond package. Do NOT move forward without this documentation.
• Compare their contingent fee to industry averages. If a firm is requesting over 25%, continue to shop around .Make sure there are no additional fees for any of their services.
• When Shopping ask if the firms have any available Receivables Management or Credit services besides collections at the contingent fee (again there should be NO COST for these services)
• Ask about status reporting. Ensure that you will receive a status report regularly. You are the client. You are the one who should set the rules from the very beginning. Tell them what you want. If you want weekly reports. Tell them. If you want monthly reports verbally and bi weekly spreadsheet reporting sent electronically, tell them. If certain agencies can not adhere to your needs, someone else can! Just as with a potential client, it is important that both parties have a clear understanding of what the other expects.
• NO CONTRACTS. Never sign a contract with a Third Party Collection Agency. This binds you to a firm for long periods of time, and usually they will have a buyout clause, stating that if you pull accounts you have to pay them a certain percentage for their activity on those accounts in order to close them out. This is NUTS! Bad Business created by agencies usually that have low conversion collection ratios ( the time period from placement to client remittance of payment)
Working with ABNA
The process can be quite simple. I know that within my organization, ABNA International, you can submit accounts by simply emailing or faxing a copy of the last invoice or statement if you wish to place random accounts for collections. If you need to "Clean Up" the receivables or execute an "Audit Debt / Research and Debt Rescue Campaign" in order to move forward effectively and productively, you can simply email a snapshot of the aging buckets you wish to place. There are no upfront costs and the contingent fee stays the same for this campaign as with all collection placements. I offer all potential clients copies of our License, certifications and Client Insurance Bond prior to beginning the process, simply for their own piece of mind and internal records. Within 72 hours of receipt of the incoice, statements or snapshots for placement, our clients receive an initial status report, followed by both electronic and verbal reporting scheduled at my client's convenience. ABNA International creates the sense of urgency for your clients to pay without alienating your customer base. We can assist your clients with the rehabilitation of their payment habits, and they can then move forward successfully with you. Once you, the client, receive the funds through our collection efforts, ABNA simply invoices our clients 15-17% (depending upon age, balance and condition of predicted account placements) of what our clients received. ABNA International has offices, collectors, mediators, financial consultants, Government/Embassy contacts and Attorneys World Wide. There is never any language, time zone or business culture barriers when partnering with ABNA International to assist you in collecting debt. ABNA offers their clients many Free Services as well. A library of documents, agreements, applications, checklists and articles to assist your internal receivables department. We also offer Business reports on potential clients to assist you when determining your credit terms with new clients. I also offer "Financial Health Check Ups" for your current and long term clients…FREE .It is always better to be safe than sorry! I also offer assistance during peak sales season by executing follow through on credit applications completed by your potential clients. Understaffed? Sales are booming? Email me a copy of the credit applications you have piling up, and within 24 hours, they will be complete with detailed notations attached when returned. All of this is free, as a Thank You for being a client of ABNA!
Rather you choose ABNA International or another third party collections firm, the bottom line is this, USE ONE. When clients break credit terms and there are no consequences, the probability of payment is minimal. Once you suspend their credit, and they still do not pay, it is because they are giving YOUR money to YOUR competition.
PLEASE NOTE Do not place an account with more than one collection service. Make sure that if you change collection agencies, the account is only being worked on by one service.
• Create, Implement and Enforce a Strong Receivables Policy.
• Make other Departments aware of the process and ensure they abide by the policies (Sales, Customer Service, Etc.)
• Ensure all documents are Signed by the Client. This includes all docs from cradle to grave! Credit Applications, Contracts, Purchase Orders, Change Orders, Shipping Receipts and Certified Mail receipts for Final Demand notices. You name it, have back up. This will one day be your saving grace! Keep in mind that the more ammunition that you have when going into battle (attempting to collect from a difficult debtor) the better chances of success you will have.
• Offer Respect, Personality and Courtesy! Just because you are not available and displayed on the "Front Lines" of your organization for all customers to see, does not mean that you cannot be the one whom offers that extra mile by offering a satisfying experience within receivables. Be personable. Be direct and Be NICE! Remember, you can catch more bees with honey…and you can collect more debt with PERSONALITY!
• Once the Collection Process Schedule is complete internally, automatic submission of accounts to an agency is vital. If your collection efforts are exhausted- If you have made the calls, sent the notices, final demands by 91 days, then each month you should be submitting any and all accounts that enter that 90 day aging bucket. You will not lose clients, you will gain respect, and if you choose the correct agency, your clients will have assistance in rehabilitating their payment habits so you can still proceed forward in a productive and profitable manner with your clients.