How To Minimize Debt Collection Problems

By Dean Kaplan

There are definitely ways to minimize in-house debt collection problems. If you want your in-house debt collection operation to be as efficient and effective as possible, the best place to start making improvements is in your procedures that occur when you begin a relationship with a new customer. These procedures would include creation of a complete customer document file and initial and ongoing customer education.

Creating a complete customer document file is essential and can save headaches and money if and when a customer becomes delinquent. The first step is to obtain a signed credit application from all customers. The application should contain clauses that authorize your company to obtain a bank reference, a personal credit report when appropriate, and the right to recover attorney’s fees spent in collecting an account. In addition, the contact information provided on the application is essential if a future collection call ever becomes necessary. Clearly, this information is easier to obtain upfront when the customer relationship is on a cordial footing. Once you have the completed application, spend the necessary time to verify the information it contains. Remember, an unverified credit application may not be worth the paper it is written on.

Spend time in-house educating your sales staff about the purpose of the credit application and insist on the application being fully completed by the customer before it is forwarded to the credit department. A completed application includes a signature. Keep in mind that if goods are shipped before the application is signed, its terms and conditions may not be enforceable, and you might not be able to recover interest, carrying charges, or attorney’s fees.

If you proceed without a signed application, you will be selling your goods under the terms and conditions contained in your customer’s purchase order and your own invoice. The conflicting or inadequate terms contained in these documents may cause you a collection headache down the road.

In the case of a small or closely help corporate customer, you might want to have a personal guarantee in your file. One thing to note, the personal guarantee will be worthless if the guarantor signs the document in his corporate capacity (e.g., John Smith, President). By signing the personal guarantee as a corporate officer, not as an individual, John Smith would probably not be held individually liable for any outstanding debt.

From the very first day of a new customer relationship, educate the customer by ensuring that they have read and fully understood your company’s credit policy. Make a courtesy call to your new customer to ask them if there are any questions you can answer about your company’s credit policy. In addition, provide your in-house sales staff, especially new hires, with training sessions to ensure they fully understand your company’s credit policies and procedures or what is expected of them when they make a sale.

Do not allow any of your customers to slide beyond the ordinary credit terms you have established with them. If a customer begins to make late payments, consider reducing the credit line. It is important to show your customers there are consequences for violating your credit terms. Discourage extended payment terms. Educate your sales department to explain to the customer that the payment terms are fully explained on the credit application they submitted.

If a dispute arises, resolve it as quickly as possible. If at all possible, insist that the customer pay any undisputed debt immediately. The balance can be negotiated with your in-house debt collection department.

By applying these preventative measures, your company’s chance of continued on-time payment from customers is increased. In addition, your ability to get slow paying customers back on track is improved. The old adage “prevention is the best medicine,” definitely applies to the in-house debt collection process.

The Kaplan Group is a boutique collection agency specializing in large (over $10,000) debt collections due from businesses. Founded in 1991, the company has a stellar reputation (A+ rating with the Better Business Bureau) and is recognized as one of the leading collection agencies for results on large and complex matters.

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