Tips for Collecting Late Payments - Initial Strategies
The purpose of any business is to serve the clients and make profits. If the company fulfills its part of the bargain by providing the service or product, but the client refuses to pay up, the company faces serious cash flow and profitability issues, making it difficult for the company to remain in business. Any business therefore needs to take collecting late payments very seriously, and while condoning the one of genuine delays, need to react strongly to clients who default on payment or consistently make late payments.
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Initiate Direct Contact
The first step when a client misses a payment deadline is initiating direct contact without delay and asking the client to pay up. The probability of collecting a bad debt drops with every passing month following the due date.
While sending a late payment reminder letter including a copy of the invoice by recorded delivery post is an essential legal requirement if the matter eventually reaches the court, the best practice is to send the letter as a formality and talk to the client over phone or in person.
Clients operating in good faith use the conversation to discuss their inability to pay and negotiate a revised arrangement. Companies would do well to extend the payment deadline or revise the payment schedule on a strictly one off basis, and for genuine reasons faced by the client. Offering a discount for quick payment works both ways. It may prompt the client to make this payment first, over payments due to other creditors but it can also tempt the debtor to bargain for more, or try the same tactic always.
The most important consideration is to make the client commit to a definite date or revised payment schedule, and do not end the conversation with the client remaining evasive or non-committed on a definite date of payment. Make the client sign a document summarizing the revised arrangement.
Many clients require persisting calling up or meetings before they release payment. An important consideration is not to be rude or abusive to the client, while remaining assertive and indulging in tough talking. People who withhold legitimate payments remain on the lookout for any excuse not to pay up, and an aggressive demand outside the purview of the law or accepted conventions is one excuse for the client to flare up.
Most cases of future payments occur only when there is a continuous relationship between the company and the client. The client refusing to pay up on time violates his or her end of the contract, and the business is justified in withholding the services offered such as future deliveries, warranties, and services until the client pays up the dues. Most businesses are reluctant to take this seemingly extreme measure, as it would usually result in the loss of the client, with possible bad mouthing and non-payment of the existing dues. The fact however remains that no amount of business is worth it unless such business earns revenue, and by continuing to serve a non-paying client, the company is throwing good money after bad. The company nevertheless needs to adhere to the contract stipulations such as providing advance notice to the client before terminating services.
Use the principles of the 80/20 Rule to focus on what will be profitable by using the time spent servicing bad clients to serve better clients or explore new markets.
How to collect bad debt?
As a general rule of thumb, payment not received even after two months it becomes due will never be forthcoming using the company’s interna; resources. This is the time to consider deploying a third party collection agent to recover the debt. Collection agencies charge anywhere between one and twenty-five percent of the invoice receivable from the client, but use several methods to effect the collection and handle related litigation.
Collection agencies registered with the Credit Services Association (CSA) or the Commercial Collection Agency Association are the safest bet for they work within specific guidelines.
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Dragging the client who does not make the payment to court is the easiest option, but also the option that businesses should consider as the last resort. The company will have to spend time and effort to get the amount that it is supposed to get with no effort in the first place, and the incurred expenses take away the profit component of the amount in dispute.
Claims of invoices under $5,000 are handled by smaller claims courts and are inexpensive affairs. Claims for larger invoices involve filing a suit in the civil court. This is a complicated process and requires the services of an attorney. Even with a signed invoice and proof of delivery, the debtors can still fight back claiming that the goods were defective, or not as promised. A favorable judgment from the court is still not of much use to recover the bad debt unless the client has assets to seize. Information such as social security number, name of the banker, reference, or old credit report leads to property, bank accounts, or other assets of the client.
The best way to deal with bad debts is preventing bad debts in the first place.
Reduced orders, slowing down of payments, changes in phone number, business name, or address, and difficulty in contacting the client are all signs that the client is in trouble. Companies would do well to take notice of such early warning signs and avoid providing debt to such companies. Reviewing the payment history reports provided by the National Association of Credit Managers (NACM) and Dow Jones, or relying on credit reporting services are good ways to make informed guesses on whether a client will pay up on time.
The basic safeguards when giving credit include collecting extensive details of the client such as social security number, credit card details, and the like, updated every few months.
The growing number of bankruptcies makes collecting late payments without further delay, and not extending debts if possible critical for the survival of any business. A good credit and collections policy that eliminates guesswork is the best defense against bad debt.
Bloomberg Businessweek. “Five Rules for Collecting Late Payments.” https://www.businessweek.com/smallbiz/content/aug2010/sb20100831_006151_page_2.htm. Retrieved on 20 November 2010.