Small Business Education Center

Principles for Collecting Debt

Some entrepreneurs get creative in the way they collect debts. One of the more interesting stories that I can recall from memory is when a Texas electric grid contractor accepted a classic 1960’s Corvette and a 65ft sailboat located in California instead of a full cash payment. Another interesting collection story was when a merchant services provider accepted catering services from a restaurant instead of demanding cash payment to settle the account. These are certainly creative ways for getting paid.

While not every entrepreneur can settle for something other than a full cash payment, every entrepreneur should follow some basic debt collection principles. There are four basic principles to follow when collecting debts, ranked by order of importance:

  1. Collect the money owed to you.
  2. Develop a collection policy that is based on systematically following-up.
  3. Directly communicate with the customer/debtor so they can discuss their account and the amount owed.
  4. If possible, preserve the goodwill that you have with the borrower.

When business owners and managers are negotiating a past due account with a customer, it’s important to keep the end goal in mind. Get the customer to agree to pay the debt by a particular time, preferably now. Or some would say, ‘get it paid yesterday.’

“Creditors have better memories than debtors.” – Benjamin Franklin

As noted in previous articles, systematic follow-up is critical to successfully collecting debts. It’s important to create collection policies that build in regular follow-up because as Benjamin Franklin said: “Creditors have better memories than debtors.” Also, the ability to collect a debt is greater when the debt is new because once a company declares bankruptcy and is out of business, there is often little left to collect.

Direct contact with the debtor is necessary. The biggest reason for this is because it creates accountability. The borrower is now required and expected to justify their actions or decisions, and they now must be responsible for the debt. There is also a psychological aspect to having direct contact. When you call them, they now associate your voice with their debt. The must recognize that they owe money to a person and that this person will continue to follow-up with them until the debt is collected. The debt is no longer just a disembodied number on a piece of paper.

Understandably, these kinds of conversations can be uncomfortable. Often when contacting a debtor over the phone, they will become disagreeable and unreceptive. Their natural reaction is to avoid a creditor, but when they can’t avoid the creditor they will often respond to payment requests with anger. This conversation can end in an unpleasant verbal confrontation. Even though it’s sometimes possible to argue a debtor into paying up, it’s much easier and more pleasant to artfully persuade them that it is in their best interest to pay the debt.

By using the art of persuasion, you can demonstrate to the debtor the value of paying their debt immediately as well as provide them with monetary and emotional motivations to pay the debt. The value of using this approach to entrepreneurs and business managers is that they can maintain a working client relationship and they can reduce the probability of burning bridges unnecessarily and or creating additional collection costs.

We hope that you find these principles educational and that you can incorporate them into your collection policies and practices. Remember, when you have debt collection issues and need someone on your side, or maybe you want a better understanding of how you can recover bad debts, know that Burt and Associates is your go-to expert. Please feel free to contact us today through our website, email, or by phone. Our representatives are available to help you today.

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