Second-Stage Entrepreneurs

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The Check's in the Mail

How to be an artful collector and keep cash flowing.

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Some sobering statistics: Last year U.S. bankruptcy filings exceeded 1.3 million. That's dipped slightly from 1.4 million in 1998 and 1997, but remains at historic levels — up from 782,960 in 1990 and 331,264 in 1980.

This bankruptcy bonanza stems partly from a relaxing of laws in 1979. But destigmatization of debt has been a greater influence, experts say. Not paying your bills used to be considered shameful; people didn't want to be seen in public if they hadn't met fiscal obligations. Today's mindset is different; paying vendors slowly (or dodging them altogether) is a growth strategy for many companies.

And if you're the one being stiffed, it's your business that suffers. When customers don't pay, you're giving them an interest-free loan.

What's more, there's a new focus on numbers today — for both public and private companies. Delinquent accounts can take a toll on your ability to survive and thrive by:

• Sapping cash flow.
• Undermining the value of your company (should you decide to sell).
• Handicapping you with financiers. Even if you pay bills on time, a bank might be gun-shy about extending credit. Delinquent accounts are poor collateral.

Remember: You don't have true earnings until the cash hits the bank.

Collecting Begins With a Sale

Because entrepreneurs are risk-oriented and optimistic by nature, they tend to have more problems in the accounts receivable arena. That's why it is important to pay attention to the front-end of the collecting process.

Establish payment policies. Put them in writing and communicate them clearly with customers, especially first-time accounts.

Know thy customer. Before you do business with someone, make sure they fill out a credit application.

If it's a commercial customer, look for such basics as:

• Whether the firm is an individual, partnership or corporation (get names and addresses of all owners).
• How long they've been in business.
• Their bank's name, address and account history.
• A financial statement.
• Three vendors they're currently doing business with, along with payment history.

You may decide to call this document something other than a credit application, such as a client data sheet. Whatever your nomenclature, the form will help gather information for:

1. Making a better decision for extending credit.
2. Collecting the debt. Example: You might be able to attach a bank account or put a lien on the debtor's property.
3. Increasing sales. You can ask questions such as, "How did you hear about us?" and fine-tune your marketing efforts.

Verify, verify, verify. Too many companies don't even look at the application, but simply stick it in a file. Just because a customer fills out the application doesn't mean that it's true. The customer may have given erroneous information or even left some questions unanswered. Call their references.

Granted, people are going to list sources who will vouch for them, but they may lead you to other sources: Ask references if they know of other vendors who might have done business with the customer.

Train your salespeople to aid, not impede, the collecting process. One of the most common mistakes is overzealous salespeople who complete sales without even discussing payment arrangements. Don't let that happen. Customers need to understand what's due and when. After all, no one likes surprises. Besides, your sales reps have a vested interest in making sure those clients will pay. Otherwise, they're wasting time.

What's more, salespeople are often in a better position to judge the creditworthiness of a customer. For example, they can ask a client (or even receptionist): Are you hiring more people? How is your turnover rate? Are there any new products in the pipeline?

Sales reps can collect a wealth of information just by being observant: Are employees bustling around, or are cubicles empty? If the customer operates a manufacturing facility, drive around and check out the loading dock. Is product being shipped?

Finally, encourage communications between your sales and accounts receivable departments. If an account is not paying bills, the sales staff needs to know.

Early Intervention Pays Off

Entrepreneurs tend to assume that time is on their side. It's not.

The longer an account delays payment, the lower your chances of ever seeing the money. According to the International Association of Commercial Collectors and Dun & Bradstreet, the probability of collecting payment on an account that's 90 days overdue declines by 12% each month.

The reason is simple: The longer you wait, the more things can go wrong. The debtor might file for bankruptcy protection. Or other creditors might sue him, and they would be ahead of you when it comes to receiving payment.

That means it's crucial to take action early. If 15 days lapse after payment is due and you've heard nothing from a customer, contact them. Your particular approach will depend on how your business is structured and how much time you have.

Reach Out and Touch a Debtor

Most companies send a letter as a reminder, but written notices aren't very effective. You don't know if the customer received it — or even opened it. Experts rate a phone call as 10 times more effective than snail mail, and a personal visit ranks No. 1. Of course, visiting every debtor, or even calling them, isn't always practical for high-volume, low-margin businesses.

Phone calls and personal visits get results because they're interactive; they give you the chance to find out if anything was wrong. Perhaps the customer only received part of the shipment, or something may have been defective. Perhaps the bill was sent to the wrong department.

In fact, one expert recommends calling customers as soon as the service or product is delivered to ask if all went well. Not only does this "courtesy call" win brownie points from a marketing standpoint, it also functions as a disguised collection call. You have an opportunity to review payment expectations with them — in case their salesperson didn't. And if there is any problem, you find out about it early and can resolve it, preventing the customer from using the complaint as a reason not to pay.

Learning the Lingo

Keep language friendly, yet direct and firm: "Hi! This is Jane Johnson. I'm calling about the $500 balance on your account. It's 30 days past due and needs to be taken care of in full. Would you prefer to handle that by check, cash or credit card?"

• Don't apologize. After all, it's your money.
• Don't ask, "How much can you pay toward this?" The debtor's first offer is always going to be the worst.
• Don't get emotionally involved. If the customer rants and raves, remain calm and collected. If your voice shows the slightest hint of uncertainty about your intentions, you've relinquished control to the debtor.

Collecting is an art — the art of negotiating. It's about salesmanship. You need to sell them on why paying their bill is a good idea. To consumers, you might point out that timely payments build a solid credit record, which can help them get a car or home loan. Or it might be a matter of giving the debtor a reputation to live up to: "I know that you are concerned about your obligations."

Remember: Your first priority is to get paid. Secondly, determine the customer's intent.

About 80% of customers are going to pay without too much prodding. Then there are 2% who are "credit criminals" and not going to pay no matter what. That leaves about 18%, which is the group you're concentrating on.

Prioritize your efforts. Go after new customers first: Train them to be prompt payers. Then go after who owes the most.

If your debtor's problem is not having the money to pay, help him find it. Some revenue streams to suggest: personal charge card, bank loan, consolidation loan, family or friends, borrowing from life insurance, returning equipment or writing a postdated check.

Collectability of Delinquent Commercial Debt Source: Commercial Collection Agency Association of the Commercial Law League of America.

Bring on the Hired Guns

Typically, companies wait eight to nine months before turning over a bad account to a third-party collection service. That's too late. Turn a debt over after four months — or earlier, if the customer:

• Has skipped town and you don't know his location.
• Doesn't answer the phone.
• Has filed for bankruptcy protection.
• Sends you a bad check.
• Uses profanity or abusive language.

Under these circumstances, it's pretty clear that the debtor belongs to the 2% faction of credit criminals.

A collection agency can be more effective because it's focused; collecting is what it does all day. There's also a psychological advantage: When a third party calls a debtor, it signals that you're serious about getting paid.

Litigation is a last resort. It's expensive and time-consuming. Remember: Your goal is to collect payment as quickly as possible and at as low expense as possible.

One final point to ponder: Though the rate of delinquencies that you can tolerate depends on your margins, having zero bad debts should not be your objective. Your primary goal is profitability, and in some cases, it might be worthwhile to write off bad debts if you can increase profits.

Writer: TJ Becker

Other Sources:

This article was originally published in the October 2000 issue of The Edward Lowe Report.

Creative Incentive Beats Cash Discount

Terry Neese
Terry Neese Personnel Services

Terry Neese, founder of Terry Neese Personnel Services, a $10 million temporary employment agency and executive search firm, has tried using cash discounts as an incentive for customers to pay early. Yet her oceanfront vacation property is a more effective carrot. Read more...

Photo by John Eagleston.

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