Debt Collection and Leverage

Posted by Marilyn Miller on March 30, 2021  /   Posted in Uncategorized

In the past month, we have recovered the following payments for our customers:

  • A patient paid her bill because she needed an appointment
  • A marina customer paid delinquent boat storage fees so that he could get his boat ready for summer
  • Contractor paid a two year old bill so that he could buy more product from his supplier. 

All of these people had the means to pay, and knew they owed the debt.  Each debt was over a year old and each debtor had previously made failed promises to pay. What made them pay them now? Leverage!

There are many factors that can be an incentive for customers to pay you. One of the most powerful tools you may have is leverage. Leverage is the ability to without future product or service until your bill is paid. Not all business owners have the opportunity to use leverage. If you do have leverage use it to help recover delinquent accounts receivables.

Do not believe that using leverage you have is a negative thing. You are not “holding it over their heads”. You are asking them to fulfill their end of the bargain. You would not have provided the product of service or product if you knew that you would not be paid for it. 

A classic example of using leverage to get paid comes from the movie Ghostbusters. A snooty hotel manager refuses to pay the exorbitant bill presented to him for the removal of ghosts from his hotel ballroom. 

Bill Murray’s character, Dr Peter Venkman, offers to return the ghosts, which, of course would be disastrous for the hotel. Leverage!

Sometimes people give away their leverage, making it more difficult to get paid. Yesterday I received a new business inquiry who had obtained a small claims judgment but had not gotten paid. As we spoke, I learned that the judgment was against his former wife, who lived in the house with him along with their children. He was not willing to change his living situation, and I told him I thought in his current situation he had very little opportunity for payment.

Similarly, too many small business owners continue to provide customers with large outstanding balances product of service. Although in some cases, particularly in the medical field, it is difficult, perhaps impossible to deny service, it is important to set limits. It is important to have a process to know when and how you can and will 

I have a new file on my desk today from a contractor who had the perfect opportunity to file a mechanics’ lien against a customer’s property. Mechanics liens must be filed on a timely basis. The time limit to file them varies from state to state but is often 60-90 days after the work is completed. They are a great tool, the property cannot be sold until the debt is paid. However, if a mechanics lien is not filed on time, the right to use it is lost forever. No leverage!

Another collection file I have is for an auto repair shop that let a customer take his car without paying anything. Now, six months later, the customer claims not to have money to pay his bill. I believe that he would have found the money had my customer required payment before they released the vehicle. No leverage!

Here are some more examples of customer debt collection using leverage successfully:

  1. Pediatrician requires payment on account in order for parent to receive camp or  school physical form.
  2. Orthodontist requiring full payment for braces to be removed.
  3. On first cold day, home heating oil company requiring full payment on old balance before new fuel is delivered.
  4. Manufacturer combining new orders at a discount if old balance paid.

In some cases you can cut a customer off entirely. In other cases, you may only be able to limit them. Whatever you do, make certain to always require at least some payment. Remember, every time a customer makes a payment, they add to the statute of limitations, the time period you have to legally collect the debt.

Accounts Receivable Management: Not a Spectator Sport

Posted by Marilyn Miller on March 25, 2021  /   Posted in Uncategorized

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!

Medical Debt Collection: Did You Intend to Offer an Interest Free Loan?

Posted by Marilyn Miller on March 23, 2021  /   Posted in Uncategorized

Over the years, I have worked with a number of medical and dental practices, helping them collect delinquent patient accounts and working with them to improve their credit practices. I am certain that any business, especially a medical or dental practice, can reduce the bad debt in their business. Consider the following ideas.

Verify and communicate insurance

For both new and current patients, verify insurance coverage before each visit. Before the patient is seen, make sure they understand any limitations and out-of-pocket expenses they may encounter, and do it in writing.  Review with patient and make sure they sign a statement that they understand and agree to pay any sums insurance does not cover.  If the patient has a high deductible, consider a separate notice that explains it. Review the notice with the patient and ask them to sign their agreement.

One of the things we often her from people in collections is, “I thought my insurance covered that”. While we understand how health insurance works and can explain it to them, if you communicate insurance coverage in advance, you might save problems down the road.

Patient Responsibility Form and Your Expectations for Payment

Each new patient should sign a statement promising to pay any out of pocket costs. The statement should inform patients when you expect to be paid and the types of payment plans you are willing to accept.

Patient Billing

Once insurance has processed the claim, patient statements should be sent that clearly indicate charges, payments and adjustments. Bill promptly and regularly.

Make it easy for patients to pay you

I recently visited a new specialist. My insurance carries a $35.00 copay per visit. The day following my visit, I received an email with a link. I was able to pay easily and quickly.  If you do not have an online payment portal, invest in one. Merchant providers are providing all sorts of options, including delivery via email and text.

Many patients now have Health Savings Accounts. Make sure to let patients know you can accept them for payment.

Offer a variety of payment plans to patients, including CareCredit or another healthcare financing option, if available to your practice. Make certain all payment plans are in writing, and signed by the patient.

Collection on Overdue Patient Accounts – It’s a process

Stay on top of overdue patient accounts. Set up a process to follow up. Compose a collection letter to send after 30 days. Your letter should be polite but firm. Again, give a specific time period for payment. You can also send a second letter with increasing urgency, and advise patient that you will take further collection action if payment is not received by the due date.

Do not hesitate to hire a collection agency

If a patient goes more than 90 days past due, you are likely going to have trouble getting paid. Consider hiring a collection agency that is experienced in medical debt collection. There are many good agencies out there, and you should be able to find an agency that understands your business.

You provided service with the expectation of being paid. You also did not intend to give an interest free loan. The more you communicate your payment expectations, the more likely it is that patients will pay you on time.

 

Ten Tips to Maximize Recovery of Delinquent Customer Accounts

Posted by Marilyn Miller on February 10, 2021  /   Posted in Uncategorized

Do you want to send fewer customers to collections? Do you want to maximize chances of recovery of the accounts you do send to your collection agency? 

Here are some ways to do it.

1. Establish a clear and consistent credit policy and stick to it.

• How much credit are you willing to extend to customers? • How long are you willing to wait for your money? • What sort of terms will you offer? • What are your competitors doing? • What image do you want to portray in the community? • When are you willing to “fire” a non-paying customer? • How far are you willing to go to collect money owed to you?

2. Develop a system to monitor your receivables.

Review the aging of your receivables every 30 days. Many small businesses use Quickbooks, which provides excellent reports that you can use to track your non-paying customers. The best report in the world is not of any use though unless you are closely monitoring it and have a plan to take action at each step along the way.

3. Designate one person as primary contact responsible for accounts receivables and collection.

The key is focus. You need one person driving the process – someone always looking, and communicating any issues to key individuals within the organization.

4. Set up in-house pre-collection process and use it consistently.

• When are you going to send a follow up collection letter? • When do you make follow up phone calls, and who makes them? • Involve sales, customer service and management in the process • Personal contact get results

5. Use a contract with every customer. Your contract MUST have: • Scope of work to be performed • Length of project • Cost of work • Terms for payment • Consequences for non-payment (interest/collection costs)

6. Use a personal guarantee in your contract with a business.

You sign a personal guarantee when you borrow for your business. Expect the same guarantee from your customers, especially businesses under three years old. A personal guarantee will enable you to recover from someone even if they go out of business.

7. Collect complete customer contact information and update regularly.

Collect all customer data you can, include all phones, place of business etc. For a business, make certain you have the correct legal name. For an individual, make certain you have full name including professional title, middle initials, Jr/Sr. Update every time you have contact with the customer. Do not simply ask, “is everything the same?” Ask, “Is you phone number 203-555-xxxx?”

8. Invoice regularly and present invoices that are clear and detailed.

Many collection problems result from poor billing practices. Make sure your invoices clearly detail each charge as outlined in your contract. State due date for payment. Send bills monthly.

9. Offer incentives for prompt payment and set up payment plans that work

Offer a discount for a cash payment, or a payment made before the due date. Or, set reasonable payment arrangements, preferably with a significant down payment (e.g. 25% down/9 equals). Be sure to document all arrangements!

10. Make it easy for people to pay you

Obtain credit card from customers for automatic payments. The more you can get people paying you automatically the better. An e-commerce payment portal might work for your business – the cost of putting it together will pay off in cash flow to you.

Small Business Debt Collection Resolutions for 2021

Posted by Marilyn Miller on December 31, 2020  /   Posted in Uncategorized
All those in favor of ending 2020, raise your hand.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certainly 2020 was a difficult year in many ways, but the good news is that if you are reading this, you are still standing. This past year has also presented opportunities to rethink our businesses, and find a new (and maybe better?) way to do things. 

President John F. Kennedy famously said, “The Chinese use two brush strokes to write the word ‘crisis‘. One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger–but recognize the opportunity”.

Many of us took advantage of the opportunity created by the COVID-19 pandemic to change the way we live and work. So which changes will you bring forward into 2021 and beyond?

Personally, I will continue reaching out to older family members, many of whom live alone. I will continue to improve my ability to work remotely wherever I am. 

As respects debt collection, we did not have the use of Small Claims Court for nearly the entire year. So, we got better at putting together settlements and payment plans. In the end, settling for a little less money may always be preferable than a drawn out legal battle.

Take a look at your credit practices – the who, what, when and how of extending credit to customers and patients. What care your resolutions to improve in the new year?

Small business credit practices are often an afterthought. I have lost track of the number of times I have heard a client say, “I know I should have….but I didn’t’, and now they have not paid me.”

You are already doing a number of things right. Look at what worked for you in 2020, and keep doing those things. At the same time, resolve to take some simple steps to strengthen your small business credit practices.

Gather and Update Customer Information

Every contact with a customer is an opportunity to collect and update information that may be helpful to you. These days, people move often. Make sure to update address, phone number and email every time you speak with a customer. Do you have current insurance information? A valid credit card? You will not know until you ask.

Remember the 3D’s: Deposits, Dunning and Documentation

Whenever you can, collect a deposit when you extend credit to a customer. Customer with “skin in the game” are more likely to respect the credit arrangement. At a minimum require a current credit card on file. Many people pay their household bills with automatic withdrawals. Payments to you should be no different. Dunning, or billing your customers on a regular basis, seems like a simple task, and is often poorly executed. Bills must be sent promptly and regularly. They must be legible and easy to understand. They must provide information on how to pay, and who to call with billing questions. This is an easy one! Proper documentation of all credit transactions, including documentation of the terms of any payment plans is a must. Memories fail us, and details not documented may be lost forever.

A customer contract is your best friend. Use a written contract for every credit customer.

Oral contracts are legal in most states, including Maine. However, once again, if you do not put terms in writing, you leave yourself open to interpretation. In a payment dispute, your customer may remember things differently than you do. Your contract must include how much to pay, when to pay,  and the consequences of non-payment. No time for a detailed contract? Send basic details in an email to your customer, and ask them to email back their confirmation. Voila, a simple contract. Remember, you can take the time beforehand to document your terms or you can argue with your customers afterward.

Stay on top of your accounts receivable, have a plan to follow up on accounts and stick with the plan.

A consistent process of review and action will make all the difference with your accounts receivable. It will boost your cash flow and reduce the number of files you will need to send for outside collections. Involve key staff. Make it fun, or at least take the dread out of the process by coaching your staff on how to talk to customers about a debt. Use a well-written debt collection letter to follow up. Managing your small business credit practices is not rocket science. It takes commitment and consistent effort. For 2021, resolve to keep doing all the great things that made you successful last year, plus a little more. United Obligations wishes you a happy, healthy and prosperous New Year!

Collection Agencies and How They Work: Is it Magic?

Posted by Marilyn Miller on December 28, 2020  /   Posted in Uncategorized

If you are like many small business owners, you have taken time from your business to work on bad debt collection. In some cases, you may have chased a customer for months without success. When you decide that customer over to a third party collection agency. When the customer pays the collection agency, you are probably upset that it took collection activity to get paid, and wonder what the collection agency did to make it happen, am I right?

Here is a trade secret. Bad debt collection is not magic. It is the result of consistent and focused effort. There are many things that you can do to reduce the risk of customer bad debt  as well as ways to protect your right to payment.  If you do send a file to a collection agency, make certain you give them all the information they will need to recover for you successfully.

To reduce customer bad debt and protect your right to be paid, it is important to get as much information as you can on customers and keep it updated.  A customer contract, even a basic one, is always helpful. Your bills must be timely and accurate. Create a standard operating procedure to follow up on slow or non-paying customers. Know when you need to hire a collection agency.

Your collection agency are not magicians. There are certain files that should never be referred for collection. For example, any file that is beyond the statute of limitations or the result of an error in billing, or when the debt is the subject of a serious dispute that should be referred to an attorney for litigation. On the other hand, a collection agency has special tools to help locate people and their assets. Collection agencies use a variety of methods to recover for you, and with your support, can improve your cash flow like, well, magic.

Reduce Cost of Debt Collection

Posted by Marilyn Miller on December 04, 2020  /   Posted in Uncategorized

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!

Small Claims Courts are Closed: Here is How to Get Paid Anyway

Posted by Marilyn Miller on December 01, 2020  /   Posted in Uncategorized

Courts in Maine and in many states continue to be closed due to Covid-19.  When they reopen, there will be a tremendous backlog.

 

If you have been using Small Claims Court to sue customers who owe you money, you will have to wait months (or years!) to get a hearing. And remember, the Court simply awards a judgment that you have to collect yourself, which will mean even more delay.

The good news is that there are alternatives to Small Claims Court.

Settlement: If your customer admits to owing you but does not have the funds the entire balance, consider settling for a smaller amount. We recommend lump sum settlements whenever possible to avoid a drawn out string of payments.  A small discount can save time and infuse cash into your business.

Payment Plans: If cash flow is an issue for your customer, they will not be able to pay in a lump sum and a well structured and documented payment plan can be a good option. Require a deposit to begin the plan. Make sure the plan is in writing and signed by the customer.

Promissory Note: Perhaps your customer is going through a rough patch but is certain to have funds to pay you in the future. A promissory note is a written promise to pay you on a certain date. The note must be specific in terms of the amount of payment, method, date, finance charges and so forth.

Set up an in-house collection agency: You will be amazed how much money you will be able to bring in if you set up a system and use it consistently. Draft a series of collection letters of increasing urgency. Provide your staff with scripts for collection calls. Meet weekly to review progress.

Hire a collection agency. Find a collection agency that has experience working in your area and with businesses like yours.  Make sure the agency is compliant with state licensing requirements (if they exist) and check references. Provide a collection agency all information regarding the debt and the delinquent customer. Keep in touch with the agency during the process.

Not every debt or every customer is right for a Small Claims Action. Even after the Courts reopen, you may find these are better alternatives much of the time. The best way to get the Small Claims Court right is to realize that is only one tool in the debt collection toolbox. Have a strategy that includes a solid in-house collection effort, a relationship with a debt collection agency and a working knowledge of the  Small Claims Courts, and success is guaranteed.

Customer Credit: You Have More Risk than You Think

Posted by Marilyn Miller on November 19, 2020  /   Posted in Uncategorized

Customer credit terms can allow you to be competitive in the marketplace. Customer credit can increase your sales and cash flow. However, terms must be closely monitored to make certain that accounts receivable stay current.

Many small business owners choose not to offer credit terms and either get paid in advance or at the time of service. If you can do this, and stay competitive in your field, great! However, you may still have customer credit risk.

risk business concept with red pawn on white

You must have a plan to recover bad checks.

A client of mine in Maine has a retail outlet as one of their businesses. Every once in a while, a customer passes a bad check to them. They know the Maine law and follow it to follow up with customers who pass them bad checks. They know what fees they can assess and what actions they can and must take to comply with the law.

Until a customer’s checks clears the bank you have credit risk. Know the law in your state and your rights as respects recovery.

Credit card chargebacks and “friendly fraud” hurt businesses.

If you accept credit cards, you have a credit risk, especially if you do not have a signature (i.e. phone orders). “Friendly fraud” also known as chargeback fraud happens when a customer disputes a charge in an attempt to get an item for free. (Doesn’t seem real friendly to me, how about you?) They may say they never received the item, or that someone else ordered it with their card. A 2016 report noted a 28% increase in fraudulent disputes.

I had a client who shipped jewelry to a customer based on an online order. The customer signed for receipt of delivery, and then promptly disputed the charge, stating that someone else signed her name and took the ring. My clients believed she received it, but despite their best attempts to counter her dispute, lost and were out nearly $ 5,000.

Another client sold a piece of jewelry to a woman in person at a trade show. A month later, the credit card charge was disputed. As it turns out, the woman was in the middle of nasty divorce and used her husband’s card to pay for the ring. This time, my client did successfully recover the money, but it took months and they had to hire me to collect the money for them.

Even for valid disputes, the time and expense answering credit card chargebacks is costly. Remember that once a customer disputes a charge, your merchant service provider will likely take the money in question out of your account immediately. You will not get the money back unless and until you win the dispute.

Have a plan in place to respond to customer credit card disputes. Respond promptly, as you will be given a limited time to do so. Keep good records, and get a signature whenever you can.

Bankruptcy does not always mean you will not get paid.

Nothing is worse than receiving a bankruptcy notice for a customer that owes a good deal of money. You may or may not be able to be paid at some point, depending on a number of factors. Know the law regarding the different kinds of bankruptcy. The bankruptcy laws offer protection to people who cannot pay what they owe, but the protection comes with some responsibilities and conditions. As a creditor, you have some rights too, and it is important to know them.

Of course, using a strong customer contract with payment terms spelled out is always a good protection. Will it prevent all problems? Of course not. It will certainly help minimize your customer credit risk.

Accounts Receivable Management and a Good Harvest

Posted by Marilyn Miller on November 17, 2020  /   Posted in Uncategorized

It’s harvest time! A successful harvest does not just happen. It is the result of a great deal of hard work. The soil must be tilled, seeds planted and nurtured. The gardener must weed often, lest the weeds overtake the crop. Drought, severe storms and many other perils could put the harvest at risk.  If the plants in the garden were poorly planted, they will not have a good root structure and might not survive wind and rain. 

Successful accounts receivable management also does not happen on its own. I am reminded of Peter Seller’s brilliant portrayal of Chauncey Gardener in the 1970 film, Being There.

A simple statement from a gardener about how seasons impact growth of the garden is interpreted as expert economic theory. In fact, it is. In order to have growth in the garden it is important that the roots are secure. Spring and summer are growth periods, while winter brings a time to prune, to wait and to plan. Fall, of course is the harvest.

In order to preserve cash flow, a small business must weather the tougher “seasons” by maintaining a strong accounts receivable management program. This is particularly true during this current pandemic. Strong “roots” – your commitment to a strong credit and collections program – will sustain you when the “storms” of economic downturn arrive. Just like the gardener nurtures good growth, a small business owner should grant, or possibly expand credit to customers who deserve it, and “weed out” customers who do not. 

Accounts receivable management means constant attention to your aging report. Identify delinquent customers and follow up with them by phone or using a well drafted collection letter.  Customers who ignore you should be referred to your collection agency without delay. 

Doing the right things in the garden – planting the right seeds and tending the garden with care – will bring a good harvest.  You can also reap the benefit of your accounts receivable management efforts with improved profitability. 

 

 

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