This is the final installment of a three part article on collections.

When a customer informs us that they don’t have any money that’s usually not the case. What they really mean is that there are others scheduled to be paid before us. Sometimes customers will use the poor cash flow excuse as a ploy to gain sympathy from us to avoid payment.

Naturally, there are customers who are having difficulty and their cash flow is weak and we should be realistic in our collection efforts and acknowledge this. In many cases the customer will have other obligations they have to meet before paying creditor bills. These may include employee wages, payroll taxes, employee benefits, facility expenses, and government taxes. The challenge for the collector is in determining what customers are truly strapped for money and who is using it as an excuse.

One of the methods is to inquire about the condition of the customer’s account receivable. This is not a conversation we can have with accounts payable but rather an owner, partner, or senior manager with a corporation. It should be introduced as looking for ways to help the customer in resolving their AR situation so that they can meet their obligations and also pay their creditors as agreed. Often times the collector is unaware or forgets that counseling is a significant element of collections along with negotiation and empathy. So when the customer informs us that they don’t have any money our response should be something along the lines of “if there was a source of money, one that you have overlooked, and it could take care of our bill and perhaps some of your other obligations, would you be interested in discussing this further?

This is a pretty straight forward question and one that an owner, partner, or senior manager will have to answer with either a “yes”, “no”, or perhaps a question such as “what do you mean by that?” The last choice may indicate the customer is suspicious but it places the collector in the position to follow up with something like “we deal with this type of unfortunate situation quite often and we are pretty good at helping firms such as yours find the money to meet their obligations, and I wanted to know if you’re interested in discussing ways of handling this that you may not be aware of.” Eventually, they should respond with either a “yes” or a “no.”

If it is yes, then we know they are willing to work with us, and  they are still considered to be a customer. If the answer is no, they have informed us they are not willing to work us and they have changed their status from customer to debtor.

Therefore, one of the first things we should establish in the early collection stage is whether the individual or firm that owes us money is a customer or a debtor. There are underlying traits that if we pay close attention will distinguish the customer from the debtor.

Customer traits:

Accepts our phone calls or returns them within a reasonable time.

Responds positively to our requests for information.

Talks to us about the reasons they can’t pay us.

Keeps the promises they make.

Pays our invoices, perhaps not in full but they pay something.

Our open to our suggestions.

Debtor traits:

Do not take or return our phone calls.

Never provide the information we request.

Will not give us any information as to why they are not paying.

Breaks their promises.

Write worthless checks.

Curses or screams at us.

Can’t speak or understand our language unless they are placing an order or want something.

Takes unauthorized deductions.

Makes false accusations to our superiors as to how we treated them.

There are times when we have done our best to collect but still are unable to motivate the  debtor to pay us.

When dealing with a customer we should always seek assistance from within our organization. This may be a subordinate, a peer, or a supervisor. It could even be someone outside the credit and collection department. Anyone in our organization who has a good relationship with the customer and can motivate them to pay our bill. Customers should never be turned over to or contacted by anyone outside our organization for payment.

If we have identified the delinquent as a “debtor” that is an entirely different situation and the quicker we transfer the debt over to a third party the better chance we have of not only getting paid but getting all that is owed us.

When dealing with debtors there are several choices available to us. The following examples of choice are in the order of the least to the most expensive and, not surprisingly, from the least likely to produce payment to the most likely.

Pre-Collection Letter Service:

These types of collection letters come from a third party rather than us which usually conveys the message to the debtor that we are serious about getting paid. The service is usually the least expensive costing between $5 and $10 per each letter.

Small Claims Court:

Anyone can file in small claims court commonly referred to as “The People’s Court”, where attorneys are not necessary but they may appear. Court procedures vary by state and the court clerk will provide the specifics. The usual procedure is to file a one page petition with whatever documents are available to support the case for a nominal cost usually less than $100. The sheriff or constable will serve the summons upon the defendant. Both the defendant and the plaintiff appear before the judge, explain their position and present whatever documents they have to support their claims and the judge renders a decision.

The advantages are:

A low cost usually less than $100 which covers the filing fee and summons by the sheriff or constable upon the defendant.

Prompt payment by the debtor. Usually, 40% or more debtors pay once they have been served by the sheriff or constable.

Judgment by default. 25% of defendants never show up for court and that automatically provides the plaintiff a default judgment.

No attorney fees. There is no need to engage the services of an attorney.

Little time involved from filing to judgment. Most cases are set for trail within thirty days from the filing date. Most decisions are rendered at the end of trial or within one or two days after trial.

The disadvantages are:

A judgment is not payment. Once judgment is received it has to be recorded and assets must be identified to seize so that money can be acquired.

If the defendant cannot be served there can be no further action until he is found and served.

Attorneys:

A letter from an attorney can be a wake-up call to the debtor. Even when collection letters and pre-collection letters are ignored, a letter from an attorney will usually be opened. Although attorney fees can be expensive, the U. S. is a litigious country and our law schools graduate over 900,000 new attorneys annually. A good attorney can be found for a nominal fee.

Collection Agencies:

Collection agencies offer the best odds of obtaining the most net dollars even after their fees are deducted. It is always advisable to hire a collection agency that specializes in collecting debts in the industry we’re in. Often they have encountered the debtor before and know who to speak with and how to motivate them to pay.

When using a collection agency it is wise to investigate their practices, obtain references along with copies of their insurance policy and liability bond. Remember, anything that a collection agency does on our behalf we are liable for whether we approved their actions or not.

A reputable collection agency will either be a member of the ACA, American Collectors Association, or CLLA, Commercial Law League of America. It is a good idea to verify their membership if they claim to be a member of either of these organizations.

Write Off the Account.

Actually, this option can be the least expensive depending on our gross margins.

This option is only recommended when the balance is small and will cost more to collect than what is recoverable. Some firms choose to write off balances that are in dispute especially from key or major customers. The risk in doing this is we may encourage the behavior that created the initial write-off..

Whatever choices we choose, they should be made within a reasonable time, usually within the first 45 days after the due date. The longer we wait to initiate action the harder it becomes to collect.

I wish you well.

David Balovich is an author, credit consultant, educator, and public speaker.
He can be reached at 3jmcompany@gmail.com or through the Creditworthy website.