The Collection Advisor

The 3 most Costly Words in Commercial Debt Collection

Posted by Brian Summerfelt on Nov 16, 2015 11:00:06 AM

The impact of time on collectability of debt: man waiting

"Bear with us."

Those three words, in a debt collection context, can cost you a bundle. They're part of a stall tactic commonly used to buy additional weeks or months, usually after an account is already past the agreed-upon due date.

And if you're involved in commercial debt collection at any level, you've probably succumbed to waiting a little longer, remembering the old adage that patience is a virtue. No one wants to appear money-starved to a customer: there is naturally a strong inclination to show we're successful and agreeable.

What harm can it do to wait a little longer?

The answer: much more than you ever thought. As your debts age, the statistical likelihood of collecting is literally diminishing by the day. A little longer (which has a habit of becoming a lot longer once you've joined the list of creditors willing to wait) is liable to cost you a bundle.

Collectability of Delinquent Commercial Debts Graph

A broad-based survey by the Commercial Collection Agency Association shows that aging debt is the opposite of fine wine or cheese, which tend to augment in value over time. The passage of time continuously and quickly erodes the collectability of debt, shrinking its value to you.

According to the sobering data, by the time a debt is 30 days overdue, it has already lost more than ten percent of its initial value in terms of recoverability. By 60 days, the probability of loss goes up to 18.7 percent. And by 90 days, your likelihood of ever collecting has been chopped down by nearly one-third. 

What does that mean to you? Well, if your standard practice is to turn a debtor over to your collection agency at 90 days or more after the due date, you are waiting too long, and likely already paying for it in bad debt writeoffs. 

If, as many businesses do, you tend to hold off until six months past the due date, you can expect to lose about half of of that debt due to diminished collectability. 

It's important to note that the survey results were compiled during relatively stable economic times. If you are collecting debt from an oil and gas service company during a commodity downturn, the urgency may be dramatically heightened.

The good news?
There is no sensible reason to wait so long.
Not ever. 

Next time a debtor asks you to "bear with us a few more weeks," or "just give me until the end of next month," remember what it really means from the standpoint of potential impact to your business and the laws of probability. In effect, you're being asked to risk the collectability of the debt by at least ten percent, and possibly much more if the debt is already old.

The solution is to implement a firm policy on past due receivables, and make customers aware from the beginning of the business relationship that there is no wiggle room with you. Accounting programs like Freshbooks or Wave automatically send payment reminders, and can include a clear reminder of your overdue accounts policy and its consequences. Make your first call early, within a day or two after the due date, and get a commitment to pay by a specific date in the very near future. If payment does not arrive on time, give a stern warning of the consequences and insist on a new commitment to pay by short-term deadline. Strike three means you must live up to your warning, which may include turning the account to a debt collection agency

The more strictly you adhere to your debt collection policy, the fewer accounts you'll have to write off in the future. It's good business practice, and can easily save you thousands in bad debt.

Author's note: although the data in the referenced survey may or may not be directly applicable to your business or industry, the prevailing trend can be seen across virtually all sectors. Credit grantors must also consider statutes of limitations which differ by province as well as regional and economic factors that inhibit collection by varying degrees over time. If you have questions, I'm here for you!

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Topics: Debt Collection, Insider Tips

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