We all make mistakes. Some are just worse than others.
In debt collection, there are three big failures we see every day, and they cost businesses a ton of money. What makes them unforgivable is that every one is quite easily prevented.
Here are The Unforgivable Three, and what you can do to avoid them – starting now.
1. Waiting Too Long
Why, oh why do Accounts Receivable managers sit on their overdue accounts as long as they do? There are a number of reasons, really. Perhaps you don’t want to taint a customer relationship. Or maybe the debtor is (perpetually) just a week or two from bringing in a big receivable. Meanwhile, the debt’s statistical collectability is in rapid decline. And in little as two years – provided the debtor is even still around – the local Statute of Limitations can render a debt worthless!
The Solution: Set a specific maximum number of days before ALL overdue accounts are sent to your collection agency, as in everything past 90 days without exceptions. Make it clear to all customers that you stand by your limit as a matter of policy, and you’ll see bad debt write-offs shrink.
2. Disputes & Denial
Much too often when an invoice goes unpaid, the customer challenges its validity. Perhaps they’ll claim the product was not delivered, was damaged, or the quality was unacceptable. By this point, you (or even your collection agency) may not have a leg to stand on.
The Solution: Get everything in writing. If there was a problem initially but you resolved it, get proof of how you did so. Having a signed contract that outlines the terms of your agreement makes a world of difference. If you run a services business that bills for hours logged rather than specific deliverables or approvals that are subjective in nature, spell this out in your engagement contract. Keep copies of signed waybills, and if orders are not refundable, be sure the customer understands this at the time of purchase – and require a signature to prove it. Once your standard paperwork is set up, the contract stage can make both parties more comfortable, and is sure to keep your receivables healthier.
3. Disappearing Debtors
Although it happens most often in consumer collections, disappearing debtors are an increasing problem for B2B companies in places like Alberta where the economy is struggling. You know the scenario: bills are overdue, and the customer suddenly goes dark. Back in the day when every home and business had a land line from a lone telephone company, it was more difficult for a debtor to vanish. With prepaid phone cards and throwaway email addresses, it has never been easier to go into hiding. Even for a collection agency that does amazing skip-tracing detective work, it can be time consuming.
The Solution: Know your customer. A detailed credit application can make it much easier to avoid skips, and to find the ones that do happen. Character, professional and trade references can be helpful not only in validating a tenant or credit applicant, but can help find a debtor who has faded into the ether. Emergency contacts can also be very helpful if spoken to strategically. Your credit application can be a great place to state payment terms and set a maximum number of days for any dispute, right above the signature line.
Bonus Tip: Requiring a copy of Photo ID can ensure you have a real name, middle name(s) and other information the customer will often not volunteer.
If you cover off these three bases, you’ll set yourself ahead of the vast majority of credit grantors, and be positioned to collect while money is still available.
For more insider pointers that have helped businesses collect millions of dollars and avoid bad debt write-offs, be sure to download my free tipsheet with the link below!
