Author Archives Marilyn Miller

Credit customers are a great way to increase sales. If you are smart about how you grant your customers credit, you will be ahead of your competition. However, if you do not have a plan or if you have a plan and do not follow it diligently, your cash flow will suffer.

First and foremost, you need a contract with your customers. Even an informal agreement such as an email with customer agreeing to your payment terms is better than nothing. If your customer is a business, a personal guarantee is important.

The Five Kind of Credit Customers

So how do you decide how to grant credit: to whom, how much, and for how long. To do so, it is important to understand your customers, and how they pay. Our experience has shown us that there are 5 kinds of “payers”:

Prompt and Regular – You never worry about payments. They pay on time. They deserve the most credit at the best terms.

Slow but Steady – Usually long term customers who you count on for regular orders who have always paid, just slowly. They are usually 30-60 days behind, but are a good source of business. Grant them credit, but watch your outstanding balance. Set a maximum outstanding balance. Offer discounts for prompt payments. If they go beyond 90 days, get on the phone and speak to them.

First Round Collection – These customers, when sent to a collection agency or attorney, pay voluntarily. They want to get back into your good graces. They need your product or service. Customers with seasonal needs often fall into this category. A fuel oil dealer client of ours saw a big rush of payments after the first frost. Require these clients clear up any old balance before you extend any more credit.  After payment, require a deposit or convert them to a cash basis.

Legal Collections – These collection clients will not pay without a legal action. Some will pay when they are sued. For other customers, you will have to obtain a court judgment against them, and then perhaps they will get religion and pay. For still others, you may have to resort to property liens, wage garnishments or other extreme measures. It should go without saying, but these customers should not only not have any credit with you, but should not be customers at all.

Never Going to Pay – Customers who go out of business, have no assets to attach, or who file bankruptcy are almost always a lost cause. Look to see if there is any possibility to recover, but be prepared to walk away.

Customers may move from one group to another, and hopefully you are watching the aging of your receivables and will take the appropriate actions.

Customer credit is a privilege, not a right. Watch your customers, how they pay (or don’t pay), and cash flow will take care of itself.

If you have hired a collection agency, congratulations! You have taken an important step towards improving cash flow and saving time and effort. In order to get the best results, however, you must work closely with the collection agency.

Effective communication with the agency is key.

You should expect your collection agency to keep you apprised of their progress. They will primarily do so with monthly reports to you. You also have a responsibility to communicate any new information to your agency. If you receive a payment in your office, let the agency know immediately. If you learn any new information about customers in collection agency – address, phone, job – anything, pass it along. Research is a big part of debt collection and new information is precious to an agency. Also, advise your agency if there are customers in collections that you would take back once their debt is paid. They may be able to use that information and the promise of redeeming their relationship with you to get you paid.

Stop billing the customer, and stop providing service.

It is important that customers in collections see you and your agency as one united front. If someone wants to pay you, take the money. However, if they want to argue about the bill, set up a payment plan, or if they beg and plead to be taken out of collections, send them back to your agency. I always tell my customers, “Take the payments, but do not take the issues.”  Your hire your agency to resolve disputes and set up and execute payment plans, so let them take the heat. Do not be surprised if customers sent to collections – the very same customers who have avoided you for months – call you and promise you a future payment to avoid “being in collections”. Unless they make an immediate payment, stick to your guns and refer them back to your agency. Your agency’s efforts – even if it was just one call – made them come to the table. Plus, every single time I have seen this happen – the customer has made a couple of payments and defaulted. Then the customer winds up back in collections – except that now I charge a higher rate! As much as possible, stop providing product or service to customers in collections. I once was attempting to collect a $ 5,000 bill for a doctor. The debt resulted from treatment for injuries resulting from a car accident, and the case was in litigation. Often physicians will accept a lien or letter of protection which “protects” the bill and promises payment when the case settles. Attorneys are often involved in these cases, and can provide letters of protection only if their clients agrees. In this case, the debtor refused to agree to lien her settlement, because she “needed the money to move”. She also refused to pay anything towards her balance. I called my client to discuss her case, and they informed me that they were currently treating her for another injury and that she had already racked up a $2.000.00 bill. This patient was effectively getting more “free” service from the doctor, and was therefore unlikely to take any demands for payment seriously. Also, stop billing the customer. Your collection agency should send regular notice, and customers who hear from two different sources may either get confused or believe that you and your agency are not working in unison, and exploit that fact.

Rate of return is everything

Collection agencies generally work on a contingent basis. They do not charge you any fee up front and are compensated with a percentage of sums recovered. While the contingent rate they charge you is important, the true measure of success  is how much they actually recover. Some agencies will offer what will seem like an attractive rate when in actuality it is a rate priced to do only a limited collection effort.  Monitor the actual rate of return you receive from your agency. If you are receiving less than a 25% rate of return (15% is the national average), then consider finding a new agency. Let your collection agency do what you hired them to do, and treat them as you would any other trusted business partner. Expect results but assist in the process. You will be glad you did.

Debt collection costs – who doesn’t hate them? I get it. You don’t get paid and have to pay someone to get your money for you. It stinks.

On the other hand, bad debt sitting on your books doesn’t do anything for you and your business. You can’t use it to grow your business or pay your employees. You have to convert those receivables into cash and to do that, you have to recover bad debt. With bad debt, something really is better than nothing.

How do you control your costs of collection? The first step is your own consistent effort to stay on top of the aging of your receivables. You must have a plan and procedure in place and you must stick to it. The better you get at your own in-house collection, the more you can keep the costs of debt collection to a minimum.

Even with the best efforts, some bad debts need to be referred for outside collection. If you have not collected the money in 90 days, you have to consider hiring a collection agency. The number one factor that drives up collection agency fees is the aging of the debt. Collection agency fees are higher for older debts. You are not doing yourself any favors hanging on debts, hoping your customers will pay you. In addition to higher fees, there are some hidden “soft costs of delay” Get help!

Debt collection costs are about more than the rate a collection agency charges. Do you have a customer contract? If you do, you may be able to charge interest and/or recover some or all of your collection costs.

So, the top three things you can do to lower your debt collection costs are:

1. Recover as much as you can in-house using smart and consistent procedure.
2. Don’t hold on to the debt too long.
3. Maximize your recovery by adding contractual language to include interest and costs of collection.

How do you manage your debt collection costs?

You have a growing small business, are “doing everything right”. You use customer contracts and have a good plan to recover bad debt in-house. When do you need to hire a collection agency?

Here are 8 signs you need to get some outside help

1. You have a growing number of receivables over 90 days past due.
2. You are spending too much time chasing non-paying customers and you do not have enough time for sales and customer service.
3. You are having trouble paying your creditors because you are owed so much money.
4. You do not have the cash flow to hire new employees or buy new equipment.
5. Customers you have been billing move and you have no way to find a new address or contact information for them.
6. You and your staff do not wish to be involved with customer disputes over payment.
7. You have been going to small claims court and getting judgments, but are still not getting paid.
8. Your accountant tells you that you cannot get a tax benefit from writing off your bad debt.

When small business owners to not get paid, it hits the community and people in the community immediately. Small business owners usually pay themselves last, and if they do not have the cash flow, they work for nothing. Heck – even President Trump has been accused of non-payment to small businesses.

Hiring a collection agency can save you time and put cash back into your business.

Debt collection agencies have resources to research and find people and their assets. They are expert negotiators who know how to handle disputes. They can set up effective payment plans and make sure people pay when they say they will. If you have obtained court judgments that you cannot collect, a collection agency knows how to attach assets, and execute court judgments using liens. Hiring a debt collection agency may be the best business decision you make this year!

Will inflation continue to rise? Will higher costs erode consumer confidence? Will fewer sales usher in a recession? The “experts” all agree on one thing, and that is that the economic signs are mixed. Stock market and employment numbers are strong, yet inflation is still high and consumer confidence is low and getting lower.

Recession or no, the time has never been better to tighten up your credit and debt collection policies and practices. Many consumers will still need your product or services. Be prepared to offer them in a way that makes them affordable for customers while still protecting your business from non-payment.

Here are some things you can do:

Clear and concise credit policy in writing. 

Your ability to grant credit (in a smart way) could separate you from your competitors in tough time. All customers do not deserve the same terms. Set your credit terms and conditions and commit them to a written customer contract. 

The Two D’s – Deposits and Discounts

A deposit should be part of any credit arrangement. Customers who have actually paid something have “skin in the game” and are more likely to adhere to credit terms. You might think that I have lost my mind recommending discounts in a tough economy, but they can be powerful tools if used correctly. Consider discounts for immediate cash payments. You can also provide a discount for early payment on a payment plan. 

And speaking of payment plans

Offering customers the ability to pay you in installments will be key during an economic downturn. One size does not fit all and all customers do not merit payment plans, so structure them carefully and always put them in writing. 

Some keys to effective payment plans:

• Make  it easy for people to pay you.  Set up an payment portal on your website. Accept multiple forms of payment, including Venmo, ApplePay and MetaPay.
• Adjust as needed.  If a customer is having trouble making payments, you can temporarily lower payment amounts. Make sure the change is agreed to in writing. You may be in a position to allow customers to skip a month or two, and add the skipped payment to end of the payment term. Again, as always, get it in writing.
• Offer payment of full balance – Not everyone is out of work or out of business. You may have customers who are doing well, and now is a great time to offer a payoff. Your can offer to waive interest or offer a small discount to pay the balance in a lump sum. It is very important to communicate these offers as “limited time only” opportunities. 

Each time you make contact with a customer who is experiencing trouble making payments, you have an opportunity to solidify your relationship. Customers who know you care about them and are willing to work with them will stick around. 

Commit to a process to monitor and track your your receivables.

You (or a staff member you trust) should be intimate with what you have outstanding at 30, 60, 90 and over 90 days and have a plan of what to do at each stage of aging. Get on the phone and speak with your customers. Send a well worded collection letter. Hire a collection agency. Use the court system. In short, take action!

Accounts receivables management, if properly executed, will impact every aspect of your business. You will have more time, more sales, better cash flow. On the other hand, if you do not manage your receivables, they will end up managing you.

You can significantly reduce debt collection costs with a customer contract before you grant customers credit.  However, too many small business owners do not have a written contract in any form. If you wait until after the transaction,  it is, as my mom would say, “Closing the barn door after the cows have gotten out”.  Good solution, but too late to be of any use.

How do customer contracts help debt collection?

Customer contracts are your most important tool.  They often make the difference in your ability to collect a debt, or in your collection agency’s ability to do so. Customer contracts are often the very thing that convinces a customer to pay.

Can I use an oral contract?

Oral contracts are legal in Maine and in many states. However, an oral contract leaves the terms and conditions open to interpretation. Take it from me – when people owe money, they may “remember” the terms differently than you do. Get it in writing!

How about finance charges?

You must have a signed contract to charge interest on past due balances. Business owners often tell me their finance charges are on the invoice. Your customer will not see the invoice until after the work is done.  That is too late!   You must prove that the customer agreed in advance to pay finance charges.

What about the costs of collection – can I pass them along?

You need a contract to recover costs of collection, that is attorney fees, collection agency fees and such. Each state has different laws regarding your ability to recover it, but in all cases, you must have a signed agreement that predates your transaction. If you wait until after the transaction, and your bill goes unpaid, it is, as my mom used to say, “Closing the barn door after the cows have gotten out”.  Good solution, but too late to be of any use. What is a personal guarantee? A personal guarantee is a contractual promise by the owners that they will personally pay the debt if the company is unable to pay. Yesterday, I received a request to collect a large bill that is owed by a company that is out of business.  They had a contract, but it is of no use because the company and its assets are gone. In this case, a personal guarantee would have been helpful. When I was thinking about writing this blog, I thought that a good analogy for the solution that comes too late, or trying to enforce contractual terms without a contract would be to compare it to putting in a sprinkler system after a fire.  However, while yes, you would not be able to prevent a fire retroactively, you could learn the lesson and install sprinklers to prevent future fires. So it is with your customer contracts. Use them to reduce debt collection costs. If you do not have a contract, get one today. You do not need a lengthy document. Even a quick email works. Update customer contracts annually.  Use a personal guarantee with business customers. In other words, close the barn door before the cows get out, not after!

Accounts receivable are an asset, but in order to be of value, they have to be converted to cash. Although some companies may enter into factoring arrangements and pledge receivables, most cannot. So basically you cannot use receivables to pay your employees or buy new equipment.

What is accounts receivable?

Accounts receivable (A/R) are defined as balances due services or product that have been provided or delivered. The definition also states that that these balances have not yet been paid. They are simply a promise to be paid. Once you are paid, and only when you are paid, do you have income. Too many small business owners confuse accounts receivables with income. Small business owners all too often delay hiring a collection agency because they have fallen in love with their receivables, and believe those nice big numbers, even when the accounts receivable are not yet collected and yes, even if they are a year delinquent. My advice is always the same: Break up with your receivables, even if (homage to Neil Sedaka) “breakin’ up is hard to do”.

You must have a plan for managing your accounts receivables.

If you do not manage your A/R, they will manage you. Your cash flow will suffer. You will find there is not enough money to pay your creditors, your employees, or yourself. A small business plan for accounts receivable management should include a plan and timetable to reach out to delinquent customers. The timetable must include a deadline for the process of forwarding delinquent customers for third-party collection and/or litigation. Your approach must be consistent and you must commit to it.

The math is simple.

If you are holding off hiring a collection agency because you are put off by the collection agency rate, you are only hurting yourself. Remember, you have not been paid. Once an account is delinquent you have in effect suffered a loss and you have nothing. 0 Times any rate is always 0 Switch your thinking to recovering as much as you can. If you plan for it using a customer contract, you may be able to recover some of your costs of collection. Some breakups are harder than others. But in the case of your accounts receivable, you have nothing to lose, and everything to gain.

Collection agencies get a bad rap. Some of the criticism is deserved. The very idea of receiving a collection call is upsetting. Some collection agencies have been poor actors. If you are a business, you hate the idea of hiring a collection agency.

However, some of the criticism comes from common misconceptions. Let’s take a look at the most common misconceptions:

Number One: Collection agencies are allowed to run rampant and have no accountability.

While requirements vary by state, many states require consumer collection agencies to be licensed and bonded. They are audited annually and held to strict professional standards. On a federal level, the Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission offer guidance and provide an avenue for consumer disputes.

Collection agencies are also subject to civil penalties if they violate the provisions of the Fair Debt Collection Practices Act, or FDCPA. The FDCPA, a federal law that limits the actions of third party consumer debt collectors.

Like any industry, there are good companies and bad ones. However, most collection agencies are realizing that they key to staying in business is treating debtors with respect. Working with people and putting together payment plans that benefit all parties is the way to go.

Number Two: Collection agencies exist to ruin the credit of people in debt.

While many collection agencies use credit reporting as means to secure payment of a debt, it is only one tool, they are required by law to do so carefully. Debts are usually not reporting until a concerted effort is made to reach the consumer for payment. The reporting of one single debt has limited impact, and only the reporting of multiple debts will actually “ruin” credit. Good collection agencies focus more on recovery for their clients, because that is how they get paid.

Number Three: Referring a non-paying customer to collections will hurt your business.

Will customers be upset when they are referred to a collection agency? Sure. Will they refuse to do business with you again? Perhaps. My question would be, “Do you want to do business with someone who will not pay you?” Some business owners and physicians believe they will get sued by customers referred to collections. I have never seen this happen and I have been doing this work for nearly 20 years. Of course, if you know of a situation that could give rise to a cause of action against you, you should think twice about referring that file.

These days, online reputation is everything. Some small business owners are concerned that customers in collections will slam them online. If someone who owes money wants to share with the world that they have not paid for services (again, I have never seen this happen), don’t you think their comment will be seen for what it is?

A dentist client once told me that he was worried that he would get a reputation as, “the dentist who sends his patients to collections”. He was owed $100,00 and was having trouble meeting his expenses. I replied that he had the reputation as the dentist who nobody ever pays. We wound up collecting thousands for him, and not one patient ever complained.

Number Four: Collection Agencies Cost Too Much

Most collection agencies work on a contingency basis, which means they take a percentage of what they recover. They do not get paid until they get you paid. If you are at the point of hiring a collection agency, you are aware that you have nothing.

Imagine a business that provides a cost for service to you before knowing what it will cost them to provide that service? That is exactly what a collection agency does. When they accept a file, they do not know if they will collect in a week or a year, but still quote you the rate to collect the debt.

If your collection agency fails to collect, you do not owe them anything. How is that expensive?

Number Five: Collection Agencies do not do Anything I Cannot Do Myself

Collection agencies only collect money. They focus on it. Do you have time to focus solely on chasing non-paying customers? Collections agencies have specialized tools to research and find people. They have the experience to determine the ability of people to pay, and the skills to negotiate a settlement on your behalf.

If you have an issue with customers not paying you, but are not sure a collection agency is right for you, pick up the phone and speak to a few agencies. Call some business owners you know and talk to them about their experiences. I think you will be pleasantly surprised.

Most people believe that a collection agency simply makes phone calls and reports debts to a credit rating agency. Certainly telephonic contact is an important part of the process. Although I contend it is overrated, credit reporting can perhaps assist with recovery.

So what else does your collection agency do?

Collection agencies have specialized tools to locate your customers and their assets.  I spend a good part of my day looking for people and their assets. “Skip tracing” is the research process in the credit and collections industry. The term comes from private investigation firms who would look for information on people who had “skipped town”. To me,  skip tracing involves finding new information (address, phone, email, assets) of customers who have moved.

Why is skiptracing important?

How important is skip tracing to the collection process? Lexis Nexis, a leading provider of research tools for law, government and collections estimates that 35% of delinquent debtors move annually. Also, 50% of files placed for collection will need some sort of skip tracing. Collection agency research might reveal a name change due to marriage or divorce, new  phone number, or a new job. They will research a file under consideration for possible legal action  to make certain there are assets (job, bank account) to justify legal action.

Does skiptracing cost more?

Your collection agency should provide skip tracing as part of their services. Although some agencies charge a higher contingency rate for collections involving skip tracing, you should not have to pay an additional fee for it.

What sources are used to skiptrace?

Services like Lexis Nexis and Transunion offer automated services collection agencies use. However, these databases use public information.  If a person must have something in their name – a utility bill, driver’s license – anything. If not, chances of finding them with this method is next to nothing. Still, it is a good first step. Collection agencies may also can review credit reports not only to obtain contact and asset information, but to get an idea of the debtor’s ability to repay the debt. Often a collection agency will review court and land records. Solid research drives the strategy. As an example, we once selected a file for litigation. The debtor had a good job and owned a home. However, she had multiple judgments liens against her, more than the value of her home. Skip tracing becomes an art when you take it to the next level and review the debtor’s social media profile. You would be amazed at how much information can be obtained from Facebook, LinkedIn or a simple Google search. I love working puzzles, and quality skiptracing is just that. If your collection agency is not doing this for you, you are missing a huge piece of the puzzle.

Accounts receivable management is essential to the financial health of a small business. All too often small business owners forego accounts receivable management, claiming that they are too busy with sales or day to day operations.

Everything is fine, they will say. We grew our sales by 50% this past year, and we have to focus on servicing our customers. If we keep them happy, they will pay us. 

Famous last words. All the sales in the world mean nothing if they are only sales on paper, that is, if you are not actually receiving money. I have seen too many business get into a cash bind because they were not paying attention to receivables.

Certainly happy customers are more likely to pay you than dissatisfied customers. However, I have built a business on collecting from people who have never disputed the product or service they received.

Design an accounts receivable program and stick to it.

Do you have an aging report? If not, you must get one immediately.  An aging report shows you which customers owe you money, and how long each customer account has gone unpaid.  It is likely that you already have the software to construct an aging report. If you do not, accounting software such as QuickBooks will do the trick.

Once you have your aging report in place, live with it. Review weekly and come up with a plan to contact delinquent customers. Bring in key staff and assign weekly tasks for follow up. I once had a client tell me that they were in such a cash bind that they were having trouble paying their bills. They began small group meetings every Friday that lasted only 30 minutes but reviewed delinquent customers, which steps had been taken, and what the next step should be.  Just paying to attention and calling customers or sending them a collection letter made a dramatic difference.

We recommend, as a rule, a 90-day process for accounts receivable management:

After delivery of product or service – Customer service call to ask if customer happy service. Use the opportunity to confirm billing information.

• Thirty days – Friendly reminder letter or notice
• Forty five days – friendly reminder phone call
• Sixty days – Second letter. You can draft a completely different letter or simply send the first letter with a stamped, “Second Notice” on it. Be creative here. Use a different color paper, or a sticker in a bright color that lets them know they need to pay you.
• Seventy- five days – Phone call from management.
• Ninety days – Final notice to pay within ten days or be turned over for collection.

You may want to wait a little longer, say 120 days for some customers, especially if they represent repeat business to you. You may forego outside collection and take them to Small Claims Court yourself.

The specifics are not as important as having a process and having the discipline to stick with the plan. Consistency is key.

Even if you are lucky to have an accounts receivable department, do not sit back and assume everything is fine. Get involved. Lend support. Let the accounts receivable team know you are available to help when needed. Let them know they are a vital part of your company.

Accounts receivable management is not a spectator sport!