Reducing Late Payments in a Cash-Strapped Economy

How to Handle Delinquent Accounts Before Calling Collections

San Francisco-based clothing and art vendor Upper Playground decided to reconfigure its accounts receivable process after experiencing a spike in late payments, says CEO Aaron Burns. Sales personnel used to call delinquent customers about their balances, but the small company wanted to avoid straining the goodwill cultivated with customers.

“Now we defer late payment issues to our accounting team and include weekly emails and statements to the customers to stay in touch as we seek payment for overdue accounts,” Burns says.

Upper Playground, he says, also created a multi-tiered collection policy that provides slightly more leniency to loyal customers. The main key to its success, he says, is clear communication with customers and a sense that their interest in being paid on time is of mutual benefit.

When clients and customers become delinquent with payments, the loss of cash flow often paints business owners on the receiving end into a corner. But those that research potential clients before inking a contract, create and thoroughly explain collection polices up front, consistently enforce those policies and treat delinquent customers with dignity have a better chance of collecting what is owed to them, experts insist. 

The final option is to turn a late account over to a collection agency, which usually severs the customer relationship and costs as much as 30% of the collected balance. Anecdotally, author and business consultant Michelle Dunn says collection agencies have enjoyed a spike of new customers and are experiencing increased demand from existing customers as the economic recession deepens.

“This is not a huge increase right now, but in talking with colleagues, we all agree that there will be more of this in the coming months,” says Dunn, based in Plymouth, New Hampshire, a collections specialist. “It is steadily increasing each week.”

But the best collection strategy, most agree, is one that succeeds before an outside agency is needed.

Preventing Delinquency Before Doing Business

Before forming a relationship with another business, executives should find out as much as they can about whether or not the prospective client is on solid financial footing and has a track record of making good on its payments, Dunn says. Check references and the company’s credit score, she says. Credit ratings for businesses are accessible through Dun & Bradstreet Inc. (D&B), similar to FICA scores for consumers.

Atlanta-based consultant Hye Yu says this kind of research is an essential part of risk management and she also suggests doing a simple Web search, contacting the Better Business Bureau or researching through trade organizations. If you’re unable to find adequate information about a potential client, “but you don’t want to use an installment or upfront plan until you’re comfortable with the business relationship,” credit cards offer a more sure way of getting paid, Yu says.

After determining the risk factors, businesses can decide what the terms will be for that client, she says.

“The suggestion is that credit and risk management for a small business is as important as actually making a sale,” says Yu, global practice leader for REL Consulting Inc. “You do the upfront work so you can avoid the backend work.”

“The suggestion is that credit and risk management for a small business is as important as actually making a sale.” – Hye Yu, REL Consulting Inc. 

Business consultant Jennifer Katrulya says companies often make the mistake of not having a game plan in place for dealing with delinquent accounts before it becomes a problem. Katrulya, CEO of Business Management Resource Group LLC (BMRC), says her firm collects an upfront retainer for services, informs clients that they will run a credit check and gives them a written copy of the firm’s collection policy upfront.

Putting Effective Procedures In Place

BMRG bills its clients monthly but gives them 15 days to make payments, Katrulya says, taking the stance that a shorter (but still reasonable) payment window provides more assurance that the client is not relying on someone else paying them before they pay you. 

“The standard in most industries is to give clients 30 days. That’s how you’re getting caught in the cycle,” says Katrulya, whose firm is based in Danbury, Conn. “If they don’t have the money at the time the services are rendered, then in essence they are making you pay for it.”

“If they don’t have the money at the time the services are rendered, then in essence they are making you pay for it.” – Jennifer Katrulya, Business Management Resource Group LLC 

Also, she says, BMRG asks for a credit card or bank account number upfront, and then simply takes the payment itself upon approval by the client. Clients also have the option of paying through a PayPal account, the online payment service operated by eBay Inc.

A few days after sending out invoices, ideally one day after receipt, BMRG calls the client to ask if they have indeed received the bill and whether there are any questions. This procedure, Katrulya says, typically eliminates excuses or evasive behavior and is carried out in a tactful manner.

If after 15 days a BMRG client still has not paid its balance, then the firm makes a point of consistently following its policy of not providing services until the overdue balance is paid, Katrulya says.

Another strategy that can have the effect of holding a delinquent client’s feet to the fire is to inform them of your intention of contacting D&B, which would adversely affect its credit rating. Outsourced drug-toxicity testing firm Apredica was able to collect on an outstanding $20,000 balance simply by providing information about the delinquent client to D&B.

The venture capital-funded startup, as chief business officer Doug Bates explains, had plenty of money. So Bates got his company accepted as one of D&B’s providers of information to its database, which is how the credit rating company compiles its scores.

“When the [former] client’s CEO learned that the manager’s actions got their credit rating trashed, he stepped in, apologized, and got us promptly paid in order to restore the company’s credit rating,” Bates says.

Applying the “Velvet Hammer” Approach

Business consultant and author Kerry Patterson says the minute creditor companies become “harsh” with delinquent clients is the minute things go south, no matter how much or how late the past due balance is. Patterson says a better approach is to acknowledge that times are tough, highlight the partner aspect of the relationship and to ask for a date, “so we can tell those who are waiting on us.”

Patterson’s philosophy essentially translates to the old mantra that one can attract more bees with honey than with vinegar.  

“You always treat them with respect and dignity. Let them know you’re pulling for them and hope they get back on their feet, even if you can’t afford to work with them,” Patterson says, using as his example a failing company that simply cannot pay its balance. “If their company comes back, then you’re the first person they call. You never burn a bridge.”

It may sound like so much sweetness and light, but Patterson insists that he has never gotten tough and has nearly always been the first to get paid, although that would be difficult to prove.

“When they’re looking at all the people they owe money to, relationships come into play.” – Kerry Patterson, VitalSmarts 

He also advises against tacking on interest to a late balance, insisting the practice only hurts the relationship. If a company is having difficulty paying its balance, he says, it is important to remember that it probably owes money to several other companies as well.

“When they’re looking at all the people they owe money to, relationships come into play,” says Patterson, chief development officer of VitalSmarts, based in Provo, Utah.  

But if it comes down to the “nuclear” option of calling the collection agency, Katrulya recommends not only checking business references but also talking to those from whom the collection agency has collected. After all, she says, the collection agency becomes an extension of your firm and can leave a bad impression of your business if it doesn’t act professionally and with dignity.

Even the best-intentioned businesses experience rough patches with clients and customers, but the key is to collect what is owed in a timely manner, gracefully and without conflict.