Commercial Collections Blog

January 30, 2013

6 Ways to Handle a Debtor Who Suddenly has Problems

When creditors extend credit, many things can happen. What do you do if your best customer tells you “I’m Drowning in Debt”?

You need your money and have worked really hard to get and keep your customers. Perhaps the best way to handle this situation is, upon the account becoming past due, reschedule payments.  This proves you appreciate your client, but expect them to honor their obligations. At the same time, it’s very important for your business re-evaluate their line of credit with regard to both limit and terms.  This should be a written sound credit policy, so all customers are treated the same.

When financial crisis impacts a client, it may impact you too.  You need a Plan of Action that is well organized and realistic. For newer companies, give first importance to cash flow so your business is adequately funded.

Credit Policy

As a business owner, you must protect your interests. Most companies suggest being vigilant about your credit policy for any new customer.  Also, be cautious of any new customer wanting immediate credit.  Require references, and trust your instincts if you receive suspicious report from an unverifiable reference.  As a rule of thumb, treat your customers request for credit just as your vendors treated you.

Collect Your Money; Cash-Flow Generating Tips

  1. Past due accounts provide some of the most potential to increase your cash-flow quickly.
  2. Allowing Accounts Receivables to grow and age reduces the likelihood they will be collected. This creates the need to depreciate the original account balance. It’s worth noting that an account 60 days past due is as much as twice as likely to be collected than one which is 90 days past due.
  3. Begin acting on accounts at 30 days, and turn them over to a Collections Agency before 60 days.  These steps may save you the agony writing them off.

How to Keep Commercial Accounts Paying

1. Do the Homework before extending credit: Forward-thinking companies can receive a new client a complimentary Credit Risk Analysis Report from Burt and Associates upon request. Our report is much more than a Credit Report.

2. Explain Credit Terms Upfront:  Stacking the deck in your favor is smart practice. Your Invoices must clearly state the maximum number of days in which payment dollar amount is the “Same as Cash”.  Then, state the late charges which occur starting the next day.

3. Set More Favorable Credit Terms for Faster Payments:  Offer a discount for pre-payment, and perhaps a smaller one for payment immediately upon receipt.  Never allow customers to take payment discounts they are not entitled to.

4. Use the “Velvet Hammer” Approach: Some business experts insist that treating customers respectfully goes a long way in getting you at the top of their list when paying bills.

 

Credit Policies and Slow Payments

Many times, slow payments result from a company’s Credit Policies. It’s important to be aware of ways credit policy can create unpaid bad-debt balances. Here are some internal company situations that may encourage customers to pay late. The most important factor is a creditor culture which accepts slow payments without penalty to the debtor.   Also, problems occur when managers are reluctant to ask for money and allow that attitude among their staff.

Also, problems ensue when there is a lack of clear company credit policies. Lastly, staff without commercial collection skills are less likely to be able to listen and empathize — while at the same enforcing the rules.

A/R is a Valuable Asset Which Must be Managed

Anything (tangible or intangible) your business owns is an asset.  Assets are things of value that can be converted into cash.  A business has tangible assets such as physical items and inventory stock, plus intangible assets such as key employees and customer base.  Many business owners don’t consider accounts receivables as an asset however.

Your accounts receivables are one of the most important assets you have, and must be managed with the same attention as the assets mentioned earlier.  Just like physical assets, your A/R depreciate as they age.  This depreciation reflects the diminished likelihood of collection as time passes.  An account which just became 60+ days past due has depreciated by 40% — as the current likelihood of collection has been reduced by 40% due to the passage of time.