Collections! We all deal with the problem of collecting for what we have previously sold on open account terms. It seems to be never ending and we often deal with the same customers and their problems every month. Every day credit professionals are asked the question by their management, “How do we improve our collections while still working to meet the goals of the sales organization”. We seem to continue working harder at this objective without improving our results.

We’ve addressed this topic over the years in numerous education columns. Today’s column will revisit some of those topics and discuss some additional ideas to consider. Not everything discussed in this venue will apply to everyone’s situation but we think there is something for everyone to consider.

We are less than 60 days into a new year and the first thing to ask is what are we doing differently right now then what we did in 2005 to meet our goals and the company’s expectations? If we are unable to identify what we are doing differently then we need to consider making some changes. Change, although difficult, is necessary if we are to improve. Albert Einstein once defined insanity as doing the same task the same way over and over but each time expecting a different outcome. Collecting for many of us can be defined as insanity.

What can we do differently to reduce the pursuit of unpaid invoices?

OBTAIN WRITTEN AGREEMENTS. Although many businesses do not have or require written sales contracts that does not prevent the credit department from obtaining a contract for payment from the customer. The majority of credit organizations employ an information gathering device known as the credit application. The credit application as defined by Regulation B of the Equal Credit Opportunity Act is not a legal document. However, we can make changes to transfer the credit application into a credit contract, a binding agreement. Begin by changing the name of the credit application to credit agreement. Then transfer all the legal wording we have included in our credit application from the bottom to the top of the document and transfer the information section, name, address, legal entity, etc., to the bottom of the document. When the customer signs the document he is no longer signing a credit application, he is signing a credit agreement.

GET TOUGH WITH LATE FEES. The majority of business to business transactions are conducted between corporations. The majority of states do not regulate how much interest one corporation (including limited liability companies) can charge another. It is left to the corporations to negotiate. Regardless, the majority of business still do not charge more than 18% (1.5% per month) on past due balances. Consider raising those late fees to 25, 50, 60% in our credit agreement. Many will say that it makes no difference what amount is charged as the customer does not pay late charges anyway. The reason they do not pay them is often because the customer never signed an agreement to pay late charges and is therefore not legally obligated to pay them. Remember, a credit application is not a legal document nor is it a contract. Unless the customer signs a contract agreeing to pay late fees they are under no obligation to do so. A credit agreement is a contract.

APPLY PAYMENTS TO LATE CHARGES FIRST. Banks, credit card and mortgage companies always collect interest and late fees before applying payment to the amount owed. If they can do it there is no reason we can’t.

OFFER A DISCOUNT TO PAST DUE CUSTOMERS TO BRING THEIR ACCOUNT CURRENT. A customer having financial difficulty will often be more receptive to a payment discount then a well-heeled customer.

BE A SECURED SELLER. Revised Article 9 of the Uniform Commercial Code has made it easier to become a secured creditor. Secured creditors are most often paid before unsecured creditors and our experience has shown that secured creditors are most often either banks or leasing companies. Very rarely is a trade creditor a secured creditor. Ask this question, “Why would we want to give our product or proceeds to a bank or competitor?” Yet, every time we sell on an unsecured basis that is exactly what we are doing.

ALWAYS CHECK CREDIT REFERENCES BEFORE DOING BUSINESS WITH A NEW CUSTOMER. We’re not talking about the references the applicant has provided or a credit report. We all know who our competition is and if the applicant is not buying from us they are buying from them. So, let’s call the competition first and determine what we are getting ourselves into.

COMMUNICATE WITH SALES. Sales will always be our best source of information whether it be a new or old customer. If we do not have good communication and rapport with our sales department then we will continue to have collection difficulties.

SUBSCRIBE TO PROFESSIONAL PUBLICATIONS. The majority of credit professionals we’ve encountered subscribe to publications specific to the credit industry. Although these keep us abreast of what is going on in our profession it does not tell us what is happening in our industry or with our customers. What publications does the sales department subscribe to? We want to either get our own subscription or ask the sales department to send us the last issue when they have finished with it. These publications often have current information about our customers that will not be found in credit reports or obtained at industry group meetings.

DON’T SHIP LARGE ORDERS FROM CUSTOMERS UNLESS THEY HAVE GOOD CREDIT.  Break down large orders into smaller shipments with terms that require the last shipped order to be paid before the next order is released. By doing so, you only have to be concerned with collecting the last order with a small dollar balance instead of a large order with a high dollar amount.

DON’T RELEASE NEW ORDERS FOR CUSTOMERS WITH PAST DUE BALANCES. As simple as this seems many past due balances exist on customer accounts because the customer has promised to pay for past due invoices if new orders were released. Inform the past due customer that upon receipt of their past due payment their new orders will be released. If it’s really important to the customer they will make the effort to get us the money immediately; overnight delivery, wire transfer or if we accept them, credit card payment.

DO NOT PROVIDE CUSTOMERS REASONS NOT TO PAY OUR BILLS. Identify and resolve disputes as quickly as possible. If a customer is disputing a portion of the invoice insist that the undisputed amount be paid according to terms.

FOLLOW UP PROMPTLY. Never wait more than 10 days from the invoice due date to contact the customer for payment. The old adage about the squeaky wheel getting oiled first is still prevalent today. Also, return customer phone calls the same day they are received and if possible avoid allowing customer calls to be routed to voice mail. Customers respond, pay their bills, favorably when they are given prompt attention.

REMAIN CALM, ATTENTIVE, AND FRIENDLY. Never lose our composure or professionalism if the customer becomes upset or unpleasant. Never argue with the customer. Identify what they are seeking and if we determine we are unable or unwilling to satisfy their request tell them the reasons why. Never leave the customer believing we are going to do something we can’t or have no intention of doing.

We hope as you’ve read this article you have been thinking of additional ideas you could be addressing or implementing in your organization. What we have provided in this space is not all of the solutions to improve collections but we hope that it has provided some ideas. As we said in the beginning of this article change is difficult but also remember change is a constant. Unless we begin to identify what is not working and make changes then everything will stay as it was and collections will continue to be our problem.  

I wish you well.  

The information provided above is for educational purposes only and not provided as legal advice. Legal advice should be obtained from a licensed attorney in good standing with the Bar Association and preferably Board Certified in either Creditor Rights or Bankruptcy.