One of the toughest parts of running a business is collecting overdue accounts.
For most entrepreneurs, it’s completely at odds with the reasons they got into business. It can be uncomfortable, distracting, and fraught with potential for mistakes.
Despite that you’re highly motivated and invested in the money owed to you, it’s easy to become your own worst enemy when it comes to collecting debt by giving in to temptation and doing simple things wrong.
See if you recognize these seven very common mistakes that can jeopardize your company’s debt collection efforts:
Whether it’s because you hate to put the heat on your customers, you find chasing debt unsavoury, or you’re busy with other priorities (and who isn’t?) you probably sit on old receivables longer than you should. Many businesses wait from 120 days to a year past the agreed-upon due date to send an account to collections. This is a dangerous and costly practice. Here is a good article that shows how rapidly the collectability of debt erodes over time. In order to minimize bad debt, you must train yourself and your people to act promptly on overdue accounts.
As a vendor, once you deliver your product or services, you’ve lived up to your end of the agreement. So when the customer fails to honour their commitment and pay on time, it can be infuriating. Further broken promises or unresponsiveness add insult to injury, so it’s understandable why many business owners and AR managers are tempted to call the lawyer. This is almost always the wrong route, because it takes a very long time and often equals throwing good money after bad. Even IF you are successful in court, all you have with your judgment is proof of the debt you still need to collect—after giving dibs to all other creditors while you were waiting and racking up legal fees! A good collection agency won’t charge a cent unless the money is collected, and begins working for you immediately. Some, like mine, have in-house legal collection departments specialized in commercial debt collection and used only as a last recourse. As suing should be, because it costs precious time and money.
Even IF you are successful in court, your judgment is merely proof of the debt you still need to collect.
Akin to rushing into court, some business owners or AR Managers can become heavy-handed about collecting a debt. Remember that the debtor is probably under stress, has other financial obligations, and needs motivation in finding a way to pay you first. Aggressive tactics can create a rift and work in the opposite direction. Remain respectful and professional, and don’t allow yourself to lose your cool. Never resort to threats or insults that can deteriorate the situation and put you in the wrong. If you sense things are taking a bad turn, submit the account to your debt collection agency right away, regardless of its age. They’ll collect the debt, and work to reverse bad blood that can harm your brand.
4. Excessive Empathy
Nice guys and gals get paid last. Chronically slow payers can smell one a mile away, and will pay every other bill ahead of yours. Not unlike a schoolyard bully, they will sense your weakness in collecting, and leverage your empathy against you with colourful excuses and stall tactics. The best defense for overly nice business owners is to have a strong, respect-driven collection agency that will stand up for your interests. Let customers know early on that you submit all accounts beyond 90 days overdue (or a period that makes sense in your industry) to your collection agency partner, and that it’s non-negotiable. Especially if you tend to be overly nice.
Once you turn over an overdue account to your debt collection agency, that’s it. You’re done. Give yourself a pat on the back, and go back to generating new revenue. It’s a mistake to continue pursuing the debtor, or engaging in any new negotiations that may arise when they realize things are serious. Fully empower your professional debt collectors to do their job as the third party engaged to act on your behalf. A truly great collection agency works to preserve your business relationships, and will always be more effective at doing so if you’ve stepped out of the picture.
After you submit an account to a collection agency, it’s a mistake to engage in further negotiations.
If you are having trouble collecting debt because customers often challenge your invoices, your documentation is surely in need of improvement. Be sure to have a precise and detailed contract that outlines all deliverables and your payment terms. Keep (or digitize) copies of bills of lading, invoices, cheques received, meeting minutes, and other relevant communications. Always e-mail the debtor a copy of overdue invoices in advance of making your first collection call to pre-empt a common stall tactic. By doing these things, you’ll notice an immediate drop in disputed billings. And if you do submit an account for collections, the odds and speed of recovery will be dramatically improved.
7. Choosing the Wrong Partners
Apologies if I’m the first to tell you this, but collection agencies are NOT all created the same. There are some terrible operators out there who will harass your customers, lose track of your accounts, charge you unfairly, and finish by failing to collect. Investigate the agencies you are considering carefully. Check their BBB rating (if they even have one—very few dare to), visit their office, meet them in person, and ask about their success rate for businesses similar to yours. I’m not saying my collection agency is the only good one (though I’m very proud of my team and our ethics), but please do your homework to ensure you never put your receivables and reputation in the wrong hands.
Ready to start collecting the right way? Call me at 1-888-797-7727 and prepare to be impressed by how fast things happen. Or if you’re not quite there yet (no one is judging), download my debt collection tipsheet with the link below for more great info that will put you on the right track.
I’d love to hear your thoughts. What Debt Collection Sins have YOU committed?
Brian Summerfelt is President and CEO of MetCredit, the Canada-wide debt collection agency with offices in Vancouver, Edmonton, Toronto and Montréal.