If you are extending credit to your customers, you must be prepared to take on a different role: that of a bill collector. Bad debts cost real money, yet some small businesses are reluctant to go after their slow paying customers. In contrast, large corporations, with the luxury of having collections departments, have the resources to chase down past due receivables. Since you don’t have this luxury, you might want to consider ways to Accelerate Collections and Minimize Receivables.
One step is to streamline your billing process. The ideal billing approach is to collect payments when goods and services are delivered. If you have to bill your customers for future payment, send invoices out the day the product or service is delivered. Follow up with a reminder bill two weeks later. If you don’t receive payment in thirty days, get on the phone and make a collection call. Actually talking to customers may be far more effective than sending letters because you are making contact as a real person to another real person. Your customer, if they are only receiving a letter from you, might be inclined to put it aside and out of sight. And as the expression goes, “Out of sight, out of mind.”
Another step is to encourage early payments, offer customers a discount (1 to 3 percent) for payments made within ten or fifteen days. The key to collecting money from customers is to do it without damaging the business relationship. In order to know the best course of action to take, you need to know the reason why the customer is late with the payment: is the person or company falling on hard times temporarily, or is it is going under, or do they have no intention to pay up? If the customer is feeling a temporary financial pinch, talk to your customer (if a company, talk to the president or owner). While indicating that you are willing to be patient, inform the customer that you expect to get paid as soon as possible. Ask for partial payment as proof of good faith. If your customer plans to file for personal bankruptcy or if the business is folding up, move swiftly to try to collect something before all assets vanish.
A third step is for the customer that just won’t pay, the deadbeat customer. If you do not have the time or patience to deal with deadbeat customers, assign someone to do the job for you. If do not have any staff, it might be better to turn matters to a commercial collection company to manage your past due accounts. Collection agencies usually work on a contingency basis, usually keeping about 35 percent of what they collect. Then again, 65 percent of the receivable is better than nothing!
Your strategy should be: Accelerate Collections and Minimize Receivables. A couple of quotes about debt that most of us are quite familiar come to mind and take on a new meaning when we are the ones who are owed the money.
“In God we trust; all others must pay cash.” –American Saying
“Creditors have better memories than debtors.” –Benjamin Franklin