A company should establish a written credit policy for managing their accounts receivable from the date of sale or service rendered until the account is collected. An established collection program will be the pathway to getting your accounts paid in the event of delinquency. This is especially critical considering the current downturn and issues facing today’s global economy and businesses today.
Time, of course, is of the essence in placing an account for collection. Do not let your receivables age, as the likelihood and amount of collection falls off dramatically with time.
Now, let’s take a deeper dive into the importance of creating and maintaining collection procedures.
Why have Debt Collection Procedures?
There are two basic concepts that support you having debt collection procedures:
- Time is the greatest deteriorating factor on the collectability of an account
- You will never have enough resources to collect all of your delinquencies
If you implement an early cure program, you will maximize your internal and external recoveries. Early cure programs, in addition to collecting, help you identify and single out no-pays from slow-pays and treat each accordingly.
- Accounts 60 days or less of age are more than 80 percent collectable.
- Accounts more than 90 days of age are typically less than 50 percent collectable (internally).
- Working accounts less than 60 days delinquent will typically maximize your internal recovery.
- Use a third party for those more than 90 days delinquent and focus internal efforts on the easier, slow-pay accounts.
- Develop and use a “60-Day Pursuit Program”
- Concentrate internal efforts into the time frame where they are most profitable
- Start on your delinquents early — contact them often in the 60-day period
- Become progressively stronger as the 60 days go by
- Elements to use in the “60-Day Pursuit Program”:
- Copies of statements and invoices
- Previous letters
- Information obtained from a sales visit
- Information obtained from phone calls
- Suspension of credit
- After 60 to 90 days, your options are:
- Continue to pursue internally with reduced results
- Write off the account
- Use an attorney
- Use a collection agency
- Use a full-service credit bureau
An effective collections policy requires some kind of formal system that ensures overdue accounts get paid. Letting late payments languish can disrupt cash flow and harm your company’s chances of success.
To keep receivables flowing smoothly, many businesses use a series of letters and phone calls to encourage customers to pay. These communications start out friendly and progressively become more serious and insistent as payments become overdue.
How you structure your collections system is an individual matter – you may be more comfortable calling up clients than sending letters, for instance. The important thing is to have a system, and you can use the steps outlined below to create one that works best for you.
The following timetable and actions to be taken are based on our recommended “60 day pursuit program” for a company with agreed upon payment terms that the debtor must pay in full within 30 days of providing the product or service.
An example of a system that you might implement is as follows:
Sample Collection Letters
The most effective letters are short and sweet, to the point and easy to read. Letters should of course contain the date, the debtor name and address, invoice numbers, amount due and date due.
Sample Second Overdue Notice
“We recently mailed you a statement showing that your account is past due. Perhaps it has been overlooked. Here is another copy. Please send payment today, so that we can keep your account current. Thank you.”
Sample First Collection Letter
“This confirms our conversation on [Date]. As we discussed, you will send us your payment in full. Let us settle this matter now. Please mail in a check today. Thank you.”
Sample Second Collection Letter
“Your account is now seriously past due. If payment is not received within 7 days, we will be forced to suspend your credit privileges with our company. We value you as a customer. Help us continue to serve you by bringing your account up to date immediately. Please mail us a check today. Thank you.”
Sample Final Collection Letter
“This letter confirms our conversation on [Date]. You must take immediate action to make your account current. If we do not receive payment within ten days, we will be forced to turn the matter over to a collection agency, which may adversely affect your credit rating. Please mail a check to us immediately.”
Always Notate Communications with Customers
No matter what software you use to handle your accounts receivables you want a Notes Section on every customer’s account. Every transaction, piece of correspondence, order, payment and statement should be documented. Try to include the day, date, time and whom you spoke with in your notes. This is very important and will help you if you have a discrepancy with deductions, payments or orders. This will also help you if the account ever gets past due and has to be taken to court or placed with an outside collection agency. While these notes are primarily for internal purposes, the notes should be professional in the event the client or outside party needs to review them.
Common Debt Collection Errors
If you are creating your credit policy and just starting out, you may not be familiar with some common errors or mistakes business owners make when collecting on past due accounts. Below are some of the most common mistakes. Make sure you don’t make these mistakes. ·
- Not getting a credit application, agreement or contract in writing and signed.
- Not checking customers’ credit history before extending credit.
- Extending credit to anyone who walks in the door or calls on the phone because they “sound like they will pay.”
- Not having a credit policy in place and enforcing it.
- Not systematically using letters and forms to collect on past due accounts
- Unintentionally “harassing” a debtor.
- Not asking for the money that is owed because they hate asking for money.
- Not understanding how a collection agency can work for them.
- Not knowing when it is the right time to turn a debt over to a collection agency.
- Waiting too long to use a collection agency.
Important Collection Tips to Remember
- Harass, oppress or abuse someone who owes you money
- Use threats of any kind but more specifically, threats of violence or harm against the person, property or reputation of someone who owes you money
- Publish or display in a public place a list of customers who have not paid you or gave you a bad check
- Use the telephone or e-mail to annoy the debtor
- Advertise anyone’s debt to you
- Falsely imply that you are or work for an attorney or government office
- Imply that they have committed crime
- Misrepresent the amount owed
- Imply that an attorney is involved, if one is not
- Tell customers they will be arrested if they do not pay you.
- Make your letter look like legal forms when they are not
- State that you will seize, garnish, attach, or sell their property, wages or assets unless you legally intend to take that action
- Threaten court action unless you intend to sue
- Use a false name when signing letters or making collection calls
- Deposit a post-dated check early
- Use postcards for debt collection purposes
As a reminder, you can find sample documents, a credit policy handbook, and more, here: https://www.cincb.ky/business/a-credit-policy-for-you/. You can also access even more tools by becoming a member here: https://www.cincb.ky/business/become-a-member/.
CINCB has been established since 2002 to provide debt collection and credit reporting services. CINCB serves over 260 creditors locally and internationally with a local team of highly experienced agents ready to serve you. Services are delivered fully online at www.CINCB.ky. Contact us today to find out more.