In-House Debt Collection Considerations 1 of 6
By Dean Kaplan+
For every company, no matter how diligent the credit analysis, there comes a time when a customer becomes delinquent and debt collection is necessary. No customer ever wants to get behind in paying its bills. The challenge for the credit department is to collect the late payment while maintaining good customer relations. This is the first article in a six part series of articles about the principles of in house debt collections. This article will discuss things to consider before starting a debt collection.
When collecting an overdue invoice, a certain amount of finesse is required by the debt collector. The amount of pressure to be applied to the customer to motivate payment is tricky at best. Some things to consider before beginning the collection process include:
a. What collection process is spelled out in the company’s credit policy?
b. What is the economic climate and how might this be affecting this particular customer?
c. How important is this customer to the company?
d. What is happening to the company’s overall accounts receivable portfolio?
Answering these questions can help the debt collector develop a winning collection strategy. The answer to the last question can also uncover a red flag of a potential growing debt collections problem which will need to be solved quickly.
When a customer has become an accounts receivable problem, the credit department must decide how much time and energy to devote to the problem. One major consideration is how large the debt is. If the customer is large and the debt is significant, the credit department will be more willing to put more time and energy into the collection effort than for a small debt amount. Additionally, for small customers and debts, the credit policy may recommend writing off the amount as bad debt. One caveat about writing off small debts is that over time, a lot of write offs of even small amounts can add up to a large total. A close eye must be kept on write offs. Finally, sometimes a credit department will keep trying to collect an overdue balance even when no progress has been made after multiple attempts. This continuation of the collection effort can become expensive in terms of time wasted.
Knowing when to stop attempting to collect is very important because it can positively or negatively affect the company’s bottom-line. Sometimes the decision will be made to turn large dollar claims over to a third party commercial collection agency. This is a way to control costs while still going after debtors. Below are some additional things to consider when pursuing customer payments:
a. How old is the past-due account? Studies have shown that the older the debt is, the less likely the customer will pay.
b. Has the customer shown any sincere interest in paying the debt? Have there been any partial payments?
c. How long has this customer been doing business with your company? If the customer is new, the terms of the credit policy must be followed to the letter to send a clear message to the customer that past due payments are unacceptable and will result in a credit hold, or whatever result is outlined in the credit policy. If the customer is old, then the customer’s payment history must be examined. If any delinquencies occurred before, how was the matter handled, and the debt cleared? Also, the question must be asked if there is any problem with the product or service that might be contributing to the customer’s decision to not make timely payments.
d. Finally, an evaluation of previous dealings with the customer must be made. Has the customer followed through with its commitments previously? Is this an unusual occurrence? Has there ever been a need to close or reopen the account in the past?
All of these considerations will influence the strategy that the debt collector will use to motivate the debtor to pay. Each collection should be treated as a unique situation, with a unique strategy. No two customers are exactly alike, and no two debtors are alike either. Develop a debt collection strategy which will motivate that customer to pay, whether it stays in-house, or is sent to a collection agency.
Click here to go on to the next article in this six part series In-House Debt Collection Considerations 2 of 6.
Be sure to check out the other articles in this series:
In-House Debt Collection Considerations
- Things to Consider Before Starting Debt Collection
- Four Steps to Collection Success
- When to Start The Collection Process
- Making Contact
- Following Up On Collections
- Additional Collection Techniques
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.