of understaffed and sometimes untrained credit and collection departments,
collection personnel are often putting out fires, going from one
collection crises to the other. As a result, they often must focus on one
objective – collect the money – while making other objectives
collecting the money is obviously a high priority for the collection
staff, they obviously must not allow it to become their only goal.
Basically, there are four objectives in collecting that the collection
staff should constantly aim for:
the customer relationship.
the customer to pay on time.
for customer “financial danger signals”.
Any company can accomplish the first objective – collect the
money. Simply hire Bruno and Guido to intimidate the customer. However,
there are two problems with this approach: it is not practical and the
company would not have any customers after a few months. Thus, the nature
of collection work changes drastically when the second objective, keep the
customer, is added.
To effectively collect money while retaining the customer requires a
special ability to communicate that most people are not born with. After
all, collections is selling and credit professionals should not just sell
an idea but should also motivate the customer to adopt their point of
view. Creditors must convince customers to listen to the collector’s
request for money, and to believe that the collector wants them to be
happy about it.
When to Begin
collection begins long before the sale is made. It begins with awareness.
Awareness is what is happening in the industry, what is happening within
the company and most important what is happening with the customer.
same techniques used in credit investigation and analysis should be used
in the collection process. Often times the account receivable department
is divided with one group responsible for credit investigation and
approval and the other group responsible for collections. Regardless, the
credit application and file is not only a credit tool but more importantly
it is a collection tool. The credit application and file serves both
credit application should contain information that informs the collector
who the customer is, not just their name but also their legal entity. Are
they a corporation, partnership or proprietorship? Their legal structure
will play an important role in not only how the collector collects but
also the collector’s success.
credit file generally contains information about the customer’s payment
habits along with their financial condition. One of the most important
things for the collector to identify is whether he or she is faced with a
collection problem or a business problem.
collection problem is one where the customer owes more then he is capable
of repaying. One of the important things to consider when dealing with a
collection problem is that the company has probably contributed in
creating the problem by providing more credit then should have been
extended. Therefore, the collector should focus on the solution rather
then the problem.
business problem often can be found in the customer’s payment
information. Does the customer have a record of slow payments to other
creditors? If the answer is yes then he is not going to pay the company
any differently then other creditors. The company knew in the beginning
that he did not pay his bills on time and yet the company agreed to
provide a credit facility. In this situation the collector again needs to
focus on the solution not the problem.
organizations who do not ask for or verify references, and there are more
out there then one would imagine, are guaranteed to have more collection
problems then the average in their industry.
business problem lies within the creditors organization. What has the
credit department or those in other departments done, or have failed to
do, to create the illusion of a collection problem. Before the debtor is
ever contacted the collector should address the following areas:
Unresolved billing or shipping disputes
Un-issued credits for billing or shipping errors
“Special terms” given by the sales department
Improper application of customer payments
majority of collection problems is created within the creditor’s
organization and is not the fault of the customer. Therefore, the first
collection call should always be made to those within the organization who
have the ability to affect the account receivable balance. Those internal
question that should be asked of them is “do you know of any reason why
the EFG Company has not paid invoice number 2345”. More often then not
someone in the organization knows. Let’s consider that for a moment.
a customer ever been contacted for payment only to inform the collector of
special terms, credits owed them, or product returned? When the collector
was informed of this how did he/she feel? Foolish, upset, uninformed?
Anyone who has collected accounts receivable has been in this position at
least one time.
a customer is able to provide the collector information they aren’t
aware of, the message that sends to the customer is that the collector
doesn’t know what’s going on in his/her organization. And sadly, often
the collector doesn’t. It doesn’t have to be that way. It requires the
collector to change the way collection calls are made.
The five most commonly asked questions by collectors are:
When do I start collecting?
Who do I contact?
What method of communication is most effective?
When and how often do I follow up?
When should I consider using a third party to assist?
not only begins with the application and subsequent investigation but also
with the opening of the customer’s account. The customer should be
contacted (in fact the law, Regulation B requires that they be contacted)
and not only informed of the decision to extend credit but also what is
expected of the customer. This is a critical step in the collection
process because it establishes the foundation of the credit relationship.
It also eliminates the excuse the customer often uses “but no one ever
told me …”.
professionals are constantly faced with customers not paying according to
the agreed upon credit terms. Thus, they must find ways to entice the
customer to pay. However, the best time for handling a collection problem
is before it becomes a collection problem.
following should be conveyed to the customer in the first contact:
The account has been opened
Amount of credit extended and what is required if more credit is needed
Terms of sale (when payment of invoices is expected)
Address where payments are to be sent
The collector’s name, phone number and address (if different then
where payments are sent).
In addition the collector should obtain the following
information from the customer:
The address invoices are to be sent to
Whether purchase orders are required or not
The names of persons authorized to place orders
The names and phone numbers of persons to contact regarding payment of
invoices, deductions, etc.
many times collector’s will say “ I don’t have the time to do
this”. Well, that’s simply not true. Because the reality is the
collector can do it in the beginning or they can do it after the customer
is past due.
example, many times the customer is called concerning a past due
invoice and the collector discovers they have the wrong phone number or
contact name? Then the collector has
to find out whom to talk to about the invoice. How much time did that
take? Probably more time then if the collector had called in the beginning
before they owed money. It has often been said it is a lot easier to
obtain information from someone when they want something then when they
already have what they want.
the customer is actually contacted depends on a number of things; the
company’s selling terms, the customs in the industry; the company’s
competitive position, and the company’s financial requirements.
companies, due to their competitive nature are notorious for not
contacting the customer until the invoice is 45-60 days past the due date,
thereby inadvertently extending the original terms of sale. There is a
reason for putting a due date on the invoice, the day the company wants to
receive its money. To be effective customers should be contacted as close
to the due date as possible. One
of the collector’s functions is to educate the customer as to when to
pay the invoices. When the customer is contacted for payment educates them
whether they have to pay the bill on a timely basis.
payment of invoices is as important to the customer as it is to the
creditor. If it is not important to the creditor then it will not be
important to the customer.
collectors will inform the customer of the importance of paying the
invoices promptly and yet they call the customer for the first time when
the invoice is 60 days past due. It seems rather silly to inform the
customer that paying promptly is important after the invoice is past due.
If it were really important the collector would have called the customer
the day the payment was due not 60 days later.
up systems that companies employ do not make collection calls but rather
the it is the collector. Thus, the systems are only as good as the person
who uses it.
longer the customer is past due the more frequent the follow up should be.
The longer the account is past due, the less chance there is of collecting
it. There have been several studies done by organizations such as Commercial
Law League of America and the American Collector’s Association.
The results of their studies indicate that there is a 90% chance of
collecting the entire balance within the first 60 days. This decreases to
50% over 90 days and 20% over 180 days. Beyond 180 days the creditor is
resigned to accepting a settlement.
thing to remember is to contact the customer when they are prepared to pay
their bills. Customers may place orders several times in a 30-day period.
Thus, they could have several different due dates in the following month.
However, they probably pay their bills at specific times of the month that
may not coincide with the creditor’s due dates. If the customer is
contacted when they are not prepared to pay then the collector will
receive nothing more than a promise for payment when the customer is
prepared to pay. Whereas, if the customer is contacted when they are
processing invoices for payment then the collector stands a better chance
of getting paid.
the creditor offers terms that have a discount and the customer pays
within the discount terms the appropriate time to contact the customer is
before the discount date. Rather then making a collection call the
collector is now making a courtesy call to insure that the customer does
not miss the discount period. How the customer perceives the actions of
the collector determines whether they take the telephone call or transfer
the call to voice mail. If there are customers who consistently offer
excuses of not receiving proofs of delivery, invoices, or having damaged
goods, etc. These customers should be contacted ten to twelve days after
invoicing to identify any problems early so as to get them resolved before
the due date rather then having to deal with them after the due date.
Who Should Be Contacted
is where knowing the legal entity of the business comes into play. Now
regardless of the structure of the business initially the contact is
accounts payable. There is something we need to recognize about accounts
payable and many collectors fail to recognize this fact.
payable clerks have responsibility but no authority; they do what they are
told to do.
fact, many accounts payable clerks cannot inform the collector about
deductions, short pays or when payments will be made because they have not
been provided that information. When accounts payable is unable to answer
the collector’s questions the collector needs to contact the persons in
the customers organization who can. Generally those people will be the
or Sales Manager
are the persons who have the authority to instruct accounts payable to pay
or not pay invoices.
How Should the Customer Be
exists today many ways of contacting the customer for payment. The most
actually writing, calling or visiting the customer it is essential that
the collector have all the information necessary to not only collect but
also to answer questions or address issues that may arise during the
collection call. These items include:
copies (last payment received)
customer file should also be reviewed for any recent information
concerning the customer’s payments habits, financial condition, and
operations. If the file has not been updated, this is an excellent time to
do so. This information may provide the collector with reasons as to why
the customer is not paying. It will also provide the opportunity to ask
more insightful questions and possibly allow for better results in
best method of collecting is in person because the collector is
face-to-face with the customer. It is proven that people respond
differently when negotiating in person then when on the telephone.
Personal visits also provide the opportunity to view the customer’s
premises and operations. The drawback to personal visits is that they are
time consuming and can be expensive if the customer is not located close
by. Personal visits are generally reserved for seriously delinquent
accounts or larger customers.
calls or email is still the most cost-effective collection method. It’s
fast, it provides the collector the opportunity to listen to what the
customer has to say, and yet the collector remains in the office with
access to all the information they require.
dealing with a delinquent customer, expect them to be emotional.
Infrequently, a customer will become agitated and abusive. Even though it
may be difficult, remain calm and businesslike. Allow the customer to
ventilate; release whatever emotions they are experiencing. Remember,
negotiation cannot be conducted while the customer remains in an emotional
state so they have to be permitted to release those emotions. Once they
have “blown off steam’ then the collector is in an excellent position
to invoke logic and reach a satisfactory conclusion.
to making a demand for payment, decide what alternatives are acceptable.
Even though full payment should always be requested, it may not be
possible for the customer to comply. Determine the minimum dollar amount
that will be acceptable. When the customer makes a commitment, the payment
date and amount should be noted in the customer file and some form of
follow up system should be triggered to remind the collector to contact
the customer immediately if payment is not received on the promised day.
This is critical. If follow up is not swift the customer may think the
company is not serious and then collection becomes more difficult.
structuring payments over several months, keep the length of time as short
as possible, and require weekly rather than biweekly or monthly payments.
A payment plan should not exceed eleven months. If the customer needs more
than eleven months to repay he should be encouraged to seek the assistance
of a financial institution. Trade creditors exposure is designed to be
short term, less then twelve months. Banks and finance companies are
long-term creditors. The longer the loan the more money they make.
plans should be in writing, preferably in the form of a promissory note.
If the customer objects to signing a promissory note the offers of a
payment plan should be reconsidered. It may be that the customer has no
intention of paying and is looking at the payment plan as a means of
buying more time. A payment plan should never be executed without an
immediate payment at the time of signing. Keep in mind the customer is
already past due, if they are asking the company to extend the original
terms of the agreement then they should be willing to provide
consideration for that favor.
not always a possibility, the sales relationship should be encouraged
throughout the repayment period. If the customer is purchasing product or
service from a competitor then they lose the motivation to keep their
collector, with company approval, should structure the repayment plan to
allow for continued purchases of company goods and services while at the
same time reducing the customer balance. This can be accomplished by tying
the customer’s purchases into payments; i.e., a $2000 order requires a
$3000 payment. $2000 for the present order and $1000 to be applied to the
promissory note. During any payout arrangement always be prepared to take
action if any of the following occur:
Payments are not made as agreed
Checks are returned
Legal action is taken by other creditors
Bank foreclosure or termination of line of credit
are the least effective of all collection methods. Not only because of the
time involved in the delivery but also the letter, by its very nature,
suggests that the matter is not urgent. Collection letters, therefore,
should be used to confirm personal visits or telephone commitments;
provide information such as invoices, proofs of delivery, statements,
etc., or to request information necessary to update the customers file.
Letters should be utilized when making a formal demand for payment due to
a customer being past due or in default on a payment arrangement.
is a quick way to send a collection letter, however it lacks
confidentiality. When sending a fax, address it to a specific individual
and call that person first, informing them that a fax is being sent.
Faxing is a useful method for sending documents that the customer has
requested, such as invoice copies, proofs of delivery or statements of
of the collection tools used, all collection staff should incorporate an
even and professional temperament when contacting a customer. There is a
myth that unpleasant people are the best collectors. In fact, disagreeable
people are usually poor collectors. Collecting is not deciding who is
right and who is wrong. It is not about who can speak louder and longer
than the other; it is about listening. It is about two parties – human
beings – trying to resolve an issue. Franklin Roosevelt once said, “If
you treat people right, they’ll treat you right at least 90% of the
time.” Four rules that collection personnel should follow in every
collection call consists of the following:
Prepare for the call strategically.
Find the right person to communicate with.
Ask the customer directly to pay.
If a problem exists, gain agreement on a solution that is acceptable to
immediate goal is to always come away from the communication with
something. If not a check then a check number, a date, a call back time or
a payment plan. Collectors should always remember that the majority of
customers want to pay their bills in a timely manner. They generally
become delinquent because of one or more of the following:
They have not been directly asked to pay.
They have not been given a reason for fulfilling their obligation that
is stronger than the reason they have for not fulfilling it.
They simply cannot pay at the time the payment is due
Outside Collection Firm
will come a time when it becomes necessary to utilize the services of an
outside collection firm. This may be a collection agency or a collection
attorney. Collection firms should be utilized with “accounts” rather
than “customers”. Customers should never be placed with third party
firms. The differences between customers and accounts are distinctive.
Pay. They may not pay everything they owe but they send some type of
payment on a regular basis.
Accept telephone calls, and return calls, and make an effort.
Inform their creditors what is happening.
Do not make promises they cannot keep.
on the other hand are complete opposites. When to turn an account over to
a collection firm should be included in the company collection policy.
However, the sooner an account is placed with an outside agency the better
the chance of recovery. Generally, accounts should be placed within 90
days of the due date or after three unfulfilled promises whichever occurs
to use a collection agency or attorney should be determined by how far the
creditor is willing to pursue the debt. If the credit manager is willing
to use legal remedies then a collection attorney firm should be utilized.
However, if the credit manager is not willing to pursue the debt through
legal channels then a collection agency should be the choice. In either
case the sooner the account is referred to an outside agency the better
the odds of recovering the amount owed.
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