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Published Articles by David Balovich

Title: Principals Of Collection
Published in: Creditworthy News
Date: 4/14/2011

Because 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 secondary.

Although 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:

1.      Collect the money.

2.      Maintain the customer relationship.

3.      Educate the customer to pay on time.

4.      Watch 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 Collecting

Effective 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.  

The 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 functions.

The 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 vs. Business Problems

The 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.

A 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.

A 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.

Those 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.

Another 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

·         Unapplied payments

·         Improper application of customer payments

The 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 customers in:

·         Sales

·         Billing

·         Customer Service

·         Cash Application

The 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.

Has 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. 

When 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?

Training the Customer

Collecting 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 …”.

Collection 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.

The 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.

Now 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.

For 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. 

When 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.

Some 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.

Remember, 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.

Often 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.

Follow 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.

The 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.

Another 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.

If 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

This 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.

Accounts payable clerks have responsibility but no authority; they do what they are told to do.

In 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 following:

Type of Organization                                           Contact Person

Corporation                                                            Buyer or Sales Manager

Proprietorship                                                        Owner

Partnership                                                             General Partner

Limited Liability Company                                   Manager

These are the persons who have the authority to instruct accounts payable to pay or not pay invoices.

How Should the Customer Be Contacted

There exists today many ways of contacting the customer for payment. The most popular are:

1.      Letter

2.      Telephone

3.      Fax

4.      Email

5.      Personal visit

Before 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:

1.      Purchase orders

2.      Contracts

3.      Invoices

4.      Credit memos

5.      Check copies  (last payment received)

6.      Proofs of delivery

7.      Any related correspondence

The 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 acquiring payment.

The 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.

Telephone 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.

When 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.

Prior 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.

If 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.

Payment 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.

Although 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 promises.

The 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

Letters 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. 

Faxing 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 account.

Four Basic Rules

Regardless 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 both parties.

The 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

Using an Outside Collection Firm

There 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.

Accounts 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 first.

Whether 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.

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.  

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