Commercial Collections Blog

Interview with a Finance Expert


Here at Burt and Associates, we pride ourselves on our knowledge and expertise of handling collections for all companies large and small. We value the fact that we have numerous of resources and tools used to collect past due AR for all of our clients. Some of our customers are in need for one-time use; others have been with us for years. We also have a vast network based on referrals and affiliations that have been built. Their trust in our professional and thorough practices is what strengthens our relationship between client and customer. We also have a reliable and effective legal counsel on retainer set up all over the nation. Any expertise in various business and financial institutions are appreciated and applied in our company. Below there are insightful questions from out outside source who has much experience in the commercial financial world.

Q. Briefly, describe your history and level of knowledge about the commercial business and financial industry.

A. “I’ve been working in the banking industry for the past eight years and the positions I’ve held have been primarily on the underwriting and credit analysis side of the bank. My experience includes commercial, industrial, investor, and government guaranteed lending. Currently, I’m working as a banking and finance consultant for two financial institutions, one of which is a growing small-market bank and the other is a lender services provider. I focus most of my work efforts on enhancing my client’s abilities to build sound commercial and industrial loan portfolios. I do this by helping these financial institutions implement the policies, processes and procedures needed to mitigate risk and maximize returns during the origination, securitization, servicing and liquidation management phases. One of the joys about this arrangement is that I have the opportunity to consult with my clients’ clients so that they can structure their capital in a way that helps them attain their business goals and in the long run become better borrowers. This process ultimately is meant to build a stronger relationship between the borrowers and their lender who is my primary client.”

Q. Do you work with large corporations or small businesses?

A. I work primarily with main street size business. I’ve underwritten loans for and consulted with independent business owners whose companies ranged in size from several hundred million in total assets to as small as $10,000 in total assets. A few of the companies have grown to be publicly traded, but the majority of them remain growing small businesses.

Q. What key factors would you say help companies maintain financial stability and healthy growth? What can be a downfall or negative event that could put hazards on a businesses profits?

A. “There are many contributing factors, that’s why so many books are written about business, sales, management, finances and accounting. I think from my personal experiences I’ve seen a lot of what works and what doesn’t work for business owners.

I like to boil it down to my version of the 6 “P’s” for business owners:

People – You need trustworthy individuals with the right talent, the right attitude, and a passion for your shared vision. Don’t settle for mediocre results. Manage your employees well, pay them fairly with a motivating compensation program and set high-performance standards.

Product – “Sell the problem you solve for your customer, not the product or service you provide.” Positioning your services and product mix in the market place that you have identified is a major part of making yourself visible and competitive. If a business can’t do this, attaining sales goals will become very difficult, and cash flows will suffer as a direct result.

Procedures – Don’t reinvent the wheel every time you do something that is necessary to the function of your business. Be efficient, utilize industry standards, and use the methods that work the first time every time. Having to revisit a job process because you are missing a key component will cost you time and money. Remember, your time and money are precious, so don’t waste it.

Policies – I can not stress enough how important it is to have policies in place and enforced. These systems dictate how you control and secure access to your cash, inventory, information, business resources, client lists, supplier lists, company vehicles, machinery, and equipment. Simply put, no locks on the company cookie jar means you can’t keep internal staff accountable when they take a cookie, and you can’t keep outsiders from stealing your cookies. Every process and procedure must be codified in a policy.

Profits – Many business owners believe that profit is the number on the bottom line of the income statement. I.e. net profits. Many owners make the mistake of managing their businesses from the income statement, only to find out that they are broke and or in a working capital crisis. Profit is more than just the positive net monthly or annual cash flows, it’s about building value in your business, and retained earnings are how businesses increase net worth. Managing from the balance sheet will provide an owner with the correct perspective of building value and managing working capital.

Preparation – I grew up participating in Boy Scouts, and the Scouter’s motto is “Be Prepared.” Bad things happen, lightning can strike the same place twice; all good things do have an end; and insurance can save you from total losses. Prepare when it’s easy during the good times so you can survive what happens during the hard times. Business owners should consider how to prepare for different ‘what if’ scenarios such as an economic downturn, or if their product becomes obsolete, or the loss of a key employee, or the loss of a major client, or the losses created by a disaster. The goal is to survive and preserve the value of the business.

Q. If the customers of a company have defaulted on payments, what indications would you watch out for to determine if there is a bigger problem?

A. Analyzing the situation is necessary to identifying if a series of defaults are merely isolated incidents or if they are indicative of a wider industry issue. Many times business are loose in their financing requirements when economic times are good. But they get burned when an economic bull hits them unexpectedly and they react to losses by becoming overly restrictive in their financing policies. This kind of reaction can result in the loss of sales to good customers. This sort of cash flow interrupting scenario could be avoided by proactively underwriting customers and monitoring payment patterns as well as adjusting financing policies periodically to be inline with your company’s economic forecasts.

Q. How often do you see businesses write off “bad debt” at the end of the year from unpaid invoices? Do you think large corporations or small companies are more susceptible to clients defaulting on their accounts?

A. “In general, bad debts tend to occur more frequently in certain types of industries. A “tote-the-note” used car lot is an example of a type of business that may experience frequent write-offs of bad debt, but a frozen yogurt shop will likely never need to. I think industry trends and the business cycle play a more important role in determining the probability of customer defaults than the size of the company. But I would also add that compared to large businesses, smaller ones are more likely to run into cash flow problems as a result of bad debt expenses. So it’s important to consider the risks involved in customer concentrations and the financing terms extended to those customers.”

Q. What type of preventative measures would you suggest for companies to take to ensure that they are not defrauded by customers?

A. “Create policies and procedures for conducting credit checks, underwriting applications for finance requests, and screening client referrals. There are many services available for background and credit checking customers and sometimes a simple Google Search will tell you all that you would ever care to know about an individual or company. If you discover in your search that they are litigious, have a criminal record, or that they like to pay late or not at all, be proactive and structure your terms with them in a way that benefits and protects your interest rather than providing them with an opportunity to take advantage of you. Remember, character pays the debt back, oh, and money.”

Remember, character pays the debt back, oh, and money

Q. If you owned a business and your books were in the red due to a high volume of unpaid AR and none of your efforts to collect the debt were successful, would you use a collection agency or pursue legal action? What key factors in an agency would you look for to make sure you had the right fit?

A. “If it is cost effective for the debts pursued then I would consider hiring a collection company or law firm to pursue the debts. There’s no use in chasing bad money with more good money and the first step in reaching break-even is to ‘stop the bleeding’ of cash. It is the only way the business can survive and avoid a death spiral caused by a cash flow crisis. Next, I would want to remedy the cause(s) of the bad debts. Have our financing policies and underwriting standards been too lax? Have we failed to identify or measure key risk factors involved in lending to our customers? If so, what can we do to correct that problem moving forward?
In choosing a collection agency I would look for an agency that first understands the exact problem my company is experiencing and then lays out a plan and vision for resolving that problem. Next, I would want to know their track record and what their success rate has been when pursuing debts in my industry. Additionally, I would look for an agency that operates on a success fee basis, and that can show me they are actively pursuing these debts with collection methods that are beyond my company’s abilities.

Article featuring Benjamin F. Johnson VFinance Expert and Lending Consultant