How do you get customers to pay on time? What do you do if they don't? And how do you determine if you'll spend more time and money tracking down a debtor than the payment is actually worth?
Third-party debt collectors recovered $40.4 billion in 2007, according to a PricewaterhouseCoopersstudy commissioned by ACA International, a trade group for the collection industry. The study estimated that businesses wrote off $152.5 billion in bad debt that year, based on IRS statistics. (The IRS would not confirm the estimate and said the actual data for 2007 would not be available until next year.) And delinquent debts are expected to increase in 2008 as the struggling economy leaves more people and companies strapped for cash.
"There probably will be more debt that will go out to collection, but it's going to be even more difficult to collect because people don't have the money," says John Nemo, ACA spokesman. Recent surveys of small business owners show that delinquent accounts and bad debts remain concerns, although their relative importance has dropped over the last two decades, according to data from the National Federation of Independent Business. The group attributes the decline to the increased use of credit cards, which shift the problem of late payments from small business owners to credit card companies.
With the help of industry veterans, we review tried-and-true practices and take a look at newer services, to offer a practical guide to collections.
1. Insist on credit applications.
"Right now, a lot of customers who have always paid on time are suddenly unable to pay," says Michelle Dunn, a Plymouth (N.H.) author of several books on debt collection who ran a collection agency for eight years. Her first piece of advice for preventing late payments? Require customers to apply for credit. Credit applications (BusinessWeek.com, 1/8/04), which can be bought at office supply stores, record contact information for the customer, personal references and business references, like banks or employers.
Calling references can help you evaluate a customer's risk, but even if you don't check them, just using the form can deter customers who might default. "When you have someone fill out that credit application, it lets them know that you're serious about your business and you're not just handing out credit," Dunn says. If you wind up in court over an unpaid debt, the signed credit application will bolster your case.
2. Offer incentives to encourage clients to pay early.
You can also reduce late payments by giving customers incentives to pay early (BusinessWeek SmallBiz, Spring 2005). At a time when many companies are looking to save, offering a 1% or 2% discount on payments received within 10 or 15 days can improve your cash flow, and the discount you give up might pale next to the cost to collect a late payment. "If you wait and then you have to make calls and send letters, now you're spending money to get money," Dunn says.
3. Create transparent payment policies and stick to them.
To avoid disputes that can lead to late payments, make sure that prices are clear and in writing before work begins, says Eric Rigby, principal at eight-person New Orleans accounting firm Rigby Financial Group. Depending on your industry, you may be able to get a deposit or partial payment up front. For certain service providers such as home-improvement contractors, Rigby suggests they secure deposits of 50%, with full payment due when the work is finished.
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