KEY ELEMENTS OF DEBT COLLECTION PROCESS
Debt collection is the practice of obtaining payments from customers for purchases that have been made on credit. Devising and maintaining an efficient and effective system for collecting on overdue accounts should be a priority from every business. But many companies fail to give this aspect of their operations sufficient attention.
Collecting overdue accounts is, for many business owners, the most unpleasant task of all, for two main reasons. Keeping track of which accounts are overdue can be very difficult, and because most people don’t enjoy pressing others for money. But experts warn that if business owners do not establish appropriate collection mechanisms, the financial viability of the company itself can become endangered.
Most customers simply pay the amount due on their accounts upon receipt of an invoice. In some cases, however, the amount of a sale or debt exceeds a customer’s ability or willingness to pay. The business then must make special effort to collect the money owed. An effective collection programs must be to develop a customer relations and recover the company’s delinquent receivables as quickly and economically as possible, while encouraging the formerly delinquent customers to patronize the company with future good business – business that is paid within the credit terms .
Experts recommend that business owners view all but the most persistent collection problems as an opportunity to help a customer resolve a situation.In many cases, nonpayment of a credit account by a customer is due to a temporary problem – such as illness, divorce, or unexpected business losses – and a supportive approach will enable the customer to continue to patronize the business in the future. As a result, the first attempt to collect a delinquent account should be always be gentle and low-key, with an eye towards preserving the business relationship. A friendly nudge can work better than a harsh ultimatum when persuading a customer to settle an overdue account.
Customers that are honest and cooperative when dealing with a past-due account should be treated with patience. Ideally, they will be able to make a token payment and set up a schedule for repaying the full amount owed. Customers that seem reluctant but are not particularly uncooperative should be prodded gently at first, then treated with increasing firmness over time.
In these cases, it may be necessary to make a definite plan for payment of the debt and get a collateral or other reassurance. Customers that make no effort to pay money owed or engage in efforts to actually avoid fulfilling their financial obligation may require a more aggressive stance.
Key Elements of The Collection Process
Like the procedure for granting credit to customers, a business’s collection procedures should be consistent with the company’s overall goals. Ideally, the collection process should follow a well-ordered progression, so that each step builds upon the last in a timely fashion. It should also be friendly and professional, offering customers an opportunity to respond in a positive manner. In order for a collections program to meet these criteria, several issues must be examined and addressed:
Establish sensible credit policies
You can minimize collection problems at the onset by establishing sensible credit limits with your customers. Factors to consider when extending lines of credit and repayment terms include the client’s credit history and your own cash flow needs.
Organize the collection process
Accounts receivable is an essential part of functional business health, so your company should have an effective collections tracking system in place. If you have a lot of customers buying on credit throughout the month, each with different terms, keeping track can be extraordinarily difficult. However, there are a number of software programs on the market that can greatly simplify this task. Whatever recordkeeping system you eventually choose for your business, make sure that you review and update it on a regular basis.
Determine if nonpayment occurs for legitimate reasons
In some cases, customers fail to make payments in a timely manner because of internal financial difficulties. In other instances, nonpayment may be due to customer unhappiness with your business performance. Sources of discontent include failure of your company to follow through on a promise (made by you, one of your salesmen, or some other representative), late or missing shipments and/or invoices, or poor quality of goods or services delivered.
With this in mind, collection experts counsel businesses to approach overdue accounts with caution. Initial communication should be to determine the nature of the situation. Make sure that the customer receives goods or services your company provided, as well as the invoices for goods or services. Make certain that nonpayment is not due to a problem at your company’s end or an email delivery glitch.
Examine the record of the client/customer and respond accordingly
If the business in question has a long track of paying off its account in full and on time, it should be treated with gentle deference. In these instances, the nonpayment is likely an oversight, a problem with the mail, or some other minor problem. “If I have been paying on time for a number of years and then, one month, I’m late by two or three days, I would really resent receiving a collection call,” one business owner said.
Determine the appropriate method of contact
Debt collection efforts generally adhere to a natural progression, from paper to telephone notices of outstanding invoices to, at the opposite end of the spectrum assignment of accounts to collections specialists. The actual combination of approaches that you will take will probably vary from customer to customer and will depend upon factors such as the location of your customers, your relationship to each one, and your cash flow needs.
The most common step taken when a credit account becomes overdue is to use the mail to remind the customer of its obligation. This correspondence can take the form of first past-due notices, second past-due notices, notices that further purchases will be on a cash-on-delivery (COD) basis until the balance is paid on the account, and letters informing the customer that the account has been turned over to an attorney or collection agency. These letters should be sent at specific, predetermined intervals for most ordinary delinquent accounts.
Telephone notices can also be an effective means of obtaining payment. Using the telephone can help the business owner to gain an immediate understanding of the circumstances surrounding the customer’s failure to pay. It is also an effective vehicle for making payment arrangements that will fit the needs of both parties. It is important to avoid using the telephone in such a manner that the customer feels harassed, however.
Personal visits to a customer may also be considered in certain circumstances. This option is, of course, predicated on the geographic location of customer. If the customer is located several states away or overseas, a personal visit is not feasible or cost-effective for all but the largest overdue accounts. Of course, the selection of different collection methods depends on some extent to the amount of money that is outstanding on the account. Less expensive paper procedures may be most appropriate for small sums, while more expensive personal visits may be warranted for large sums.
As a final step in the collection process, it may be necessary to assign delinquent accounts to an outside collection agency or an attorney that handles collections. Key considerations to weigh in making this decision are the amount of the overdue account and the length of time that it has remained unpaid. Most businesses cannot afford to maintain a great deal of collections experts in-house, so these collections professionals can take over after the business exhausts its resources and abilities to obtain payment.
Collection agencies and attorneys generally take a percentage (usually one-third of the total amount) of the debt collected as payment for their services. Even with professional help, however, some debts will eventually be uncollectible due to bankruptcy, customers that “skip” (move without notice), or expense required to collect them.
Whatever combination of collection methods you eventually choose for your business, you will need to remain cognizant of the limitations that state and federal laws place on debt collection. For example, it is illegal to make continual phone calls, to make profane or threatening language, to threaten repossession when in fact the article cannot be repossessed, or to threaten to damage a customer’s credit report or have their wages garnished.
It is also illegal to discuss a customer’s collection problem in public. In addition, businesses have to desist with collection efforts if the target declares bankruptcy (contact an attorney to look into your rights if this takes place). Given the thicket of legal issues that surround many aspects of collection, business owners should consult an attorney before initiating aggressive approaches to collect on delinquent accounts.
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