Distraught and bathed in sweat, a business owner rushed into our debt collection agency’s head office the other day. He was clutching a civil court certificate of judgment.
“I sued this company and won,” he said. “Now how do I collect?”
The man was at a loss for what to do next, and despite his victory in court, he'd started off wrong. After all his hard work, not to mention the stress and costs of preparing for and attending a civil trial, he might still never collect the money he is owed.
At the time of this writing, the country is in a technical recession, and many companies are going out of business, especially in Alberta. When the company owing debt is in financial ruin and even the bank isn't getting paid, a court judgment can be worthless. During the time lost to stall tactics and then months of waiting for a trial, any available funds have probably gone to other creditors.
So how does a savvy business owner speed up debt collection during a downturn?
Here are 5 valuable debt collection tips that can save you a lot of grief.
- Have an iron-clad contract. It may sound obvious, but it’s amazing how many large deals are done on a handshake or with very little documentation. Taking the time in advance to prepare professional, comprehensive business contracts can be a lifesaver. Whether in making collection calls, in court, or in the hands of your debt collection agency, a contract is your legal proof of the debt. If the project scope or deliverables change, document it in detail with a contract amendment or Change Order before advancing additional deliverables.
- Require new customers to complete a credit application. If you deal with an influx of new customers, a credit application gives you a lot of information that can be helpful down the road, including the customer’s banking details. Contact all credit references and ask specific questions about how promptly the prospective customer pays and if he or she lives up to promises. If there are red flags or you’re worried about getting paid for any reason, either give the deal a pass or require the customer to sign a secured credit agreement. And if all of this seems like too much hassle, weigh that against the potential impact of writing off the debt.
- Have a late payment procedure, and act on it. When things go sideways, especially in industries like manufacturing or oil and gas, companies routinely fail. If your customer’s business declares bankruptcy, your likelihood of getting paid, even as a secured creditor, is slim to none. It’s wise to have a firm collection policy to avoid serious arrears. For example, your plan might include a reminder call soon after an invoice is past due, a second reminder call four days later, and then a written warning that the account is about to be turned over to your debt collection agency (not your lawyer, which is simply too slow and expensive in a recession). Give a deadline, and follow through with it. If you offer to accept a partial payment, get the creditor to agree to a specific payment plan until the debt is paid off in full. Make your next steps clear for the event of a failed payment or bounced cheque.
- Don’t accept excuses or stall tactics. Be confident , respectful and authoritative, and have all your backup information in hand when making collection calls. If the debtor says the cheque is in the mail, get the cheque number. If your invoice was lost, e-mail or fax it over immediately, and get confirmation of receipt. Never end a collection call without a dated commitment.
- Move swiftly. Once you have decided to take debt collection action, it’s vital to send the file to your collection agency early on the date you promised, or you will lose credibility. The collection agency will take action on your behalf and advise the debtor of the consequences of non-payment, such as notifying the top credit reporting agencies of the unpaid debt. If there is money to be found, a good debt collection agency will resolve the debt quickly. As a last recourse, if it appears the debtor can afford to pay, your collection agency may recommend litigation. The best ones have specialized in-house legal teams to keep costs down.
BONUS TIP: Step back. Once you have turned an account over to your collection agency, back off entirely and let third-party psychology go to work. Now that you're out of the equation, you can relax and focus your energy on generating new revenue, while your collection industry professionals recover your money.
These debt collection tips are just guidelines. Every debtor situation is different, and you’ll want to tailor your approach to suit the customer relationship and your desire to do business together again. During an economic downturn, even very good businesses can have trouble staying afloat, and your customer may survive, recover and prosper.
If you handle the debt collection process respectfully and with integrity, good customers may return to you when things turn around. Other business owners can’t fault you for taking care of your own business and its employees, and they will respect you for your ability to effectively manage your debt collection process.
And they will probably become a better customer for it.