Business Insights

The Simple Approach to Collections that Really Works

A healthy receivables program is essential for everything from managing cash flow to securing loans. These tips will help you mitigate losses from late payers and avoid future issues.

When it comes to collecting late payments, your mother was right: “The early bird catches the worm” and “The squeaky wheel gets the grease,” jokes Arden Silverman, owner of Capital Asset Protection, a commercial collection agency. “Do not delay when reviewing your list of payments due.”

You need to take swift action, but you should also tailor your approach based on your relationship with the client, the size of the late payment, and your instincts. As soon as payment is late, call the customer and see what the problem is, advises Jared Schiff, president of Schiff Debt Recovery Group, based in Columbus, Ohio. He explains that you can often tell if the customer is giving you a legitimate excuse. “A valid reason could be, ‘Our bookkeeper has been out of the office on vacation,’ or ‘We never received the invoice.’ If that is the case, give them a new deadline.”

On the call, clearly spell out what will happen if they fail to meet the new deadline. Ideally, your escalation plan is well-documented, so you know exactly what steps you need to take. Your action plan should reflect your business needs, your relationship with the client, and the size of the outstanding payment. Perhaps you will have to pass the matter up the chain of command, to your boss or an outside agency, or put a hold on future orders or projects. Perhaps you will have to revoke or change the customer’s credit limit, require future projects to be secured with upfront payment, or report the debt to a credit bureau. Remain professional while conveying the gravity of the situation. To invoke another old adage, “Time is money,” so no matter what your escalation plan entails, get moving on it promptly.

When to bring in a collection company

Effective collection plans allow for a degree of flexibility, but not at the expense of the business’s needs. Common sense is key. For example, you would handle a long-term client who is eager to continue working together differently than a first-time customer who is not returning your calls. Silverman suggests waiting no more than six months after payment comes due to call on a collection agency.

Business owners are often hesitant to loop in a collection agency because they don’t want to pay for it, but “the longer they wait, the less likely they are to collect the balance,” says Schiff, noting that collection agencies typically don’t charge unless they collect, so they are motivated to recoup your losses in full.

Schiff believes that six months might not be quick enough, especially if the late payer is a small business. “The debtor could become more in debt to other creditors, get sued, file for bankruptcy, sell, or close their doors. If one of those things happens, more than likely there will be no asset to go after to recoup the funds owed. That is why we suggest sending the files over for collection right when you notice the debtor is giving excuse after excuse. The quicker you place, the better the chances are for recovering the balance in full,” he says.

If you frequently find yourself dealing with late payers, it is probably time to evaluate your processes. Consider whether it is appropriate to have every customer fill out a credit application that includes references, and that you are doing your due diligence. You could consider extending a discount for clients who pay early, or penalizing those who do not pay on time with late fees.

“This might be a good time to review your contracts, invoices, and other forms to be certain you will be reimbursed for all amounts available in your jurisdiction above the balance due,” suggests Silverman. “Collecting is not just for the principle of the matter but rather principal and interest.”