When you have exhausted all your debt collection efforts and are ready to consider alternative means of collecting bad debt, weigh your options.

• In some cases outsourcing your delinquencies to a collection agency may be a viable alternative to writing off bad debt. In most cases collection agencies charge a contingency fee based on the aging of the account.
• Small Claims is a cost effective solution in recovering monies owed; please keep in mind, even if you are awarded a judgment it is still your responsibility to collect the balance due – the courts do not enforce judgments. Too often, debtors that evade their financial obligations will disregard a judgment as well.
• Depending on the balance due; you may consider turning the account over to an attorney that specializes in debt collection; more often than not this alternative leads to lengthily litigation and steep fees. There are countless unsettled judgments in the court systems that even attorneys weren’t able to recover.
• Still another alternative would be to sell the account to a debt purchaser; this alternative should be a last resort as your recovery would be minimal. Debt purchasers generally only pay pennies on the dollar to assume at risk accounts.

All of the options referenced above will result in a financial beating to your company. From an accounting perspective, bad debt is and expense that unconditionally impedes net income.

This brings us to yet another alternative to writing off bad debt; before you decide to endure financial loss turn the account over to someone who has not been directly involved in the collections process. The ideal person would be the owner of the business, a CFO or accountant; someone who has the authority to negotiate a settlement.

Before offering a settlement it’s imperative to know exactly how much it would have cost your business to utilize each of the options above; the goal is to recover more than alternative collection measures would have produced. Evaluate the costs of other collections alternatives and deduct that amount from the total you could have expected to recoup.

As many creditors know, a chargeback is a fee charged by a credit card issuer to a retailer for transactions that are disputed by a cardholder and then settled in the cardholder’s favor. Chargeback fees are generally nonrefundable; much like NSF fees, chargeback fees can range upwards to as much as $35.00 each.

Many chargebacks are the result of a fraudulent transaction due to credit card theft however there are many reasons why chargebacks may occur. Most are initiated by the cardholder for various reasons. Knowing the potential risk of chargebacks can significantly assist you in avoiding these risks. Some of these reasons may include…

• The cardholder claimed the transaction was not authorized.
• The cardholder claimed a fraudulent online, or phone order.
• The cardholder claimed a merchant changed the amount on the transaction.
• A merchandise return was denied.
• The transaction was processed with an inaccurate balance due.
• The cardholder never received the product(s) or service(s).
• Products or services were not provided as described.
• The transaction was processed more than once.
• A refund was not processed.
• The transaction was not cancelled successfully.
• The cardholder’s signature line was not signed.
• Signature on the receipt didn’t correspond with the name on the card.
• The transaction was inaccurate or incomplete.
• The account number didn’t correspond with the name on the credit card.
• The credit card used has expired its expiration date.
• Multiple attempts to use a debit card with an inaccurate pin number.
• The account was closed.
• Credit card was suspended due to lost or stolen card.

 Often times chargebacks can occur as a result of a customer’s dispute regarding credit to their account. For example if a customer returns merchandise and was offered credit in lieu of a cash refund and the credit failed to be posted to the customer’s account the customer may dispute the issue through their banking institution or credit card provider.

Creditors and merchants can minimize chargebacks by implementing a few fundamental transaction policies…

• Clearly transcribe your return/refund policy to your customers.
• Have delivered orders signed for and accepted by the receiver; this will reduce the potential of a claim the item was not received or was not as described.
• Clearly relate your contact information to all new customers (e.g. phone number and e-mail address); chargebacks are more common if the customer is not able to contact the vendor.
• Be responsive to all inquires; address any concerns professionally and without delay.
• Verify the billing address doesn’t differ from the delivery address; chargebacks may occur if the item was delivered to a wrong address.
• Accurately respond to any inquiries related to the item; for example, if a customer asks if a computer program is compatible with their system describe any variables that may inhibit the product from working for them.
• If your customer claims the product purchased is defective, offer an exchange, or refund. Credit card companies occasionally allow chargebacks on defective items, regardless if the return policy dictates no refunds or all sales are final.

When a customer pays with a debit card or credit card request their ID; document the driver’s license number on your copy of the receipt. This will curtail the potential of a claim the transaction was not authorized. 

If the order was a phone order, or online transaction request the purchaser’s ID and signature at the time of delivery.

Coping with ever-increasing costs is one thing – ensuring you get all the money that’s due you from your clientele is quite another. We’ve all experienced non-paying and slow-paying customers somewhere along the line and when it’s money we’ve really been counting on, it’s hard to accept the financial loss.

Here are some credit and collection strategies showcased in our consultations:

Set Established Payment Guidelines: To avoid problems in the first place, establish ground rules for how payment must be made and stick to them. On your order form, brochure or website, clearly clarify your terms of sale and payment options. Also have set guidelines for how you will handle checks and credit cards.

Get It in Writing: Be certain your contractual agreement or other formal agreements divulge what your payment expectations are and the consequences for late payments or non-payment. When you review the contract with your client, be sure they initial the payment policy section. This way they can’t say you didn’t tell me or I didn’t understand; your documentation will assist you in supporting your claim in the event the account escalates to litigation.

Limit amounts due from new accounts by requiring monthly or phased payments for contractual or ongoing services. If a project is ongoing, this is prearranged as part of the contractual agreement. Submit itemized bills on the month’s work (or regarding completion of the phase of a project). If payment is not received within the specified period of time; you have the option to interrupt service pending payment in full. For this to work effectively, create phases of the work with an accountability aspect to which both parties can agree before the project is commenced. Specifically chart time and progress invested on a daily basis; each billing should include a brief progress report, projections and recommendations.

Send a Series of Reminders: In most cases persistence pays off; call or send notices to delinquent clients on a regular basis; always inquire about their experience with your company with questions that require a positive response – prompt for “yes answers.” (Example: Hi John, this is Julia from XYZ Inc. Did you receive our invoice with your delivery on Friday?) If the response is yes continue your dialogue by affirming you are following up to alert them the invoice was due last Monday.  

Evaluate the Situation – Offer Options: It’s important to evaluate the integrity of your clientele; this is not always easy to do but experience says to give the client the benefit of the doubt in the beginning stages. If the client is overdue by a small margin, say a week, give them some time. To avoid allowing the account to remain overdue for weeks, or even months, you must begin the collections process early on. Sometimes simply offering to break up the payments into two or three weekly installments can be the difference between getting paid and going to court. Statistics reveal that companies who initiate informal debt collection effort from the start experience a significant increase in recovery.  

Be Persistent: The challenge – sticking to your guns and demanding payment. Hard luck stories and the natural tendency to rescue others can temp some creditors to back off and allow the client some time to pay… Sound familiar? It may seem awkward at first to be persistent but the results will be far more rewarding than if you chose to concede.

In the service emporium, it is common practice to do the work first and bill later, which often leads to collection issues; in these circumstances it will behoove you to have a formal agreement that stipulates precisely what your payment expectations are and the consequences for noncompliance.

Be Willing to Sue: You must be prepared to draw the line and hold delinquent clients accountable for their financial obligations. Sometimes a few well-chosen words in the form of a collection notice or phone correspondence can be the difference between being paid and going to court. If your in-house efforts prove fruitless, enlist your attorney to write a formal demand for payment as a “last notice” prior to pursuing litigation.

Know When to Quit: If your client is clearly eluding payment and evidence reveals they are not financially able to pay in full; before writing the account off completely, contact the client with a settlement offer. Sometimes it’s better to get something as opposed to nothing at all; particularly on small balances. This may seem a little unmerited but keep in mind that even if you pursue small claims and a judgment is awarded in your favor, it’s still your responsibility to collect – the courts do not enforce judgments. You must determine if the balance warrants the time involved to assertively pursue recovery efforts.

It’s actually cheaper for a merchant to accept debit cards as opposed to credit cards. The reason for this is that merchants incur transaction fees from their payment processor when they accept credit cards as opposed to debit cards. This applies to merchants who accept payments at the POS; these savings don’t apply to online transactions or phone payments because the customer cannot generally enter a PIN on the PIN PAD.

Rule of thumb for POS transactions: Merchants can easily tell the difference between a debit card and a credit card; the identity of the card is just above the Visa or MasterCard hologram on the front of the card. This information helps you the merchant to distinguish the cheapest way to process the card – “Credit or Debit?” Don’t ask!

If you see the word “debit” above the hologram, process it as such. By giving the customer the choice “debit or credit” you are authorizing them to determine what fees you the merchant will incur for the transaction. Credit card rates are 1.5% and up. If the customer enters a PIN on a PIN PAD the merchant’s cost can be half that amount (generally about .75%); as a merchant be certain that your payment processor offers a break on ATM card transactions. Bottom line? When the customer enters a PIN number on the PIN PAD the merchant’s cost for the transaction is cut in half. These rates are approximate; check with your provider for your actual rates.

Whether the merchant accepts debit or credit they will invariably incur a “per transaction fee;” fees can range from 10 – 40 cents per transaction – it’s important to note the merchant will incur a percentage fee AND per transaction fee.

Another thing to remember is that for larger transactions customers almost always prefer the credit option because they want to finance the purchase. If you the merchants process a debit card as a debit the balance due will be immediately deducted from the customer’s bank account; the higher the balance due, the more the merchant stands to save.

Companies that are not experiencing the best results from the language dictating their payment terms on invoices may need to consider revising their language. Try a more direct approach; please feel free to use the example that follows freely.

“If this invoice is paid by June 20^th, your cost is $ (balance due); if it is paid after June 20^th the balance due is $ (balance due to reflect additional late charges accrued).”

It’s easy to overlook details when our society is racing around us; many people fail to notice the fine print detailing the terms. Revealing an alternate dollar amount can result in capturing your recipient’s attention.

It is important that the language used on your invoices counterparts the language used on your contracts and work orders. Ensuring that all details stipulating your terms coincide eliminates the potential of misinterpretation or error.

If you’re working on a project that requires multiple invoicing as the job progresses, be certain that your final invoice is in the hands of your customer prior to the completion of the job. Touch base and review each phase of the project with the appropriate person who approves the work to ensure there are no disputes. When the recipient receives the final invoice prior to the completion of the project this gives you negotiating power. If the invoice fails to be paid in a timely manner, you have the option to postpone the completion of the project until the invoice is paid.

If invoices remain unpaid for any length of time revise the payment terms to C.O.D. immediately. Do not continue to provide services or supplies on a credit basis if the invoices are not getting paid.

There comes a time when you have to distinguish the difference between being a creditor, or loan officer. In recent years, creditors have taken on the roll of lenders by extending credit to their customers. 

When your customer is delaying payment of an invoice for 60 to 90 days or more, it’s time to diligently pursue collections of that account. Too often delinquent customers are not the only ones guilty of stalling. Many creditors consider their customers as friends and are lenient to the point of risking the financial stability of their own business. 

Friendships are made everyday in business; particularly between creditors and customers with lasting business relationships. After all, those very customers are the ones that helped us grow our business to what is has become. The rule of thumb to follow in this scenario is… just as we need to leave our personal dilemmas at home when we leave for the office… it is equally important to separate business and friendship. 

To get the ball rolling, if you don’t already have a credit management policy it’s time to implement one immediately. For more information on this topic visit South Coast Revenue online.

 Check your aging report regularly to identify potential concerns as soon as an account becomes delinquent. More often than not delinquent receivables are not caught right away due to lack of attention to the aging. 

When you recognize an account has become past due be certain the invoice was sent with the order. Invoices should accompany every order delivered. Be certain the person who delivers the order has the person receiving the order check and sign off each item in the order to verify accuracy; waiting until the end of the month to do the invoicing creates the potential for error.

It is very common for invoices to be overlooked; as a result invoices can slip through the loops and get sent long after the order was received. Additionally, if your payment terms are Net 30, the invoice is payable thirty days from the delivery date. Invoices that are sent once a month can potentially extend the payment terms to be Net 60.

 Don’t underestimate the power of persuasion… offer incentives for payments received within 10 days. Negotiating a small discount to customers who pay within ten days minimizes the potential of past due accounts.

 Back up your payment terms… Too many vendors have consequences for late payments clearly stated on their invoices. An estimated 85% of vendors don’t follow through with their terms.  If your terms dictate a 1.5% late fee will occur if payment is not received Net 30, then add on that late fee once the account extends past its terms. It is important to know that if consequences are not dictated on the contract, work order or invoices, then you cannot go back later and add late fees after the account becomes past due.

 No tolerance in your receivables may seem a little harsh, but it provides you the vendor with negotiating power. If an account becomes past due and they receive a follow-up invoice with a late fee added, you have the option to bargain with your customer by offering to waive the late fee if payment is received within 10 days.

 If you’re a vendor that specializes in customized products or services, require a 50% deposit at the time of the order with the balance due payable C.O.D. or Net 30 – be certain the remaining balance due is reflected on an updated invoice that accompanies the delivery.

 Once the account becomes delinquent, a simple phone call can identify any problems. Execute a customer service follow-up call; contact the account and inquire if they have received the order; also make sure there are no discrepancies. This small task enables you to verify the order was received as well as confirming there were no disputes. It also indicates to the customer that you are firm in your payment terms and monitor accounts closely.

 Phone contact is particularly effective in that it offers a personalized touch, provided you follow a few rules. The person executing the call must be professional, polite, and demonstrate an unwavering, professional demeanor. It is important to portray your trust that the account will pay. Never imply verbally (or otherwise) that you consider the person you’re speaking with to be a deadbeat.

 If the person you’re speaking with becomes emotional or upset, do not get caught in the trap of retaliating, even when the customer is less than polite. Reiterate your desire to assist the person in getting the account paid. Offer to arrange a payment schedule if it is not possible to pay the account in full.

 In the event that you need to send your correspondence via mail or e-mail, be certain you are sending the correspondence to the appropriate person at the appropriate address. If you don’t receive a response to your correspondence follow-up with a phone call. Traditionally follow-ups are initiated on a monthly basis; you can speed up the process by scheduling follow-ups every two weeks. If an agreement to a payment schedule was reached and the payment was not received on the date agreed upon, follow-up the very next day after the payment was due.

 During all aspect of the collections process, document every contact whether it be verbal, written, fax, or e-mailed in the client’s data sheet. It is important that your documentation clearly defines the details of each contact. In the event you need to pursue your collections efforts in court, your documentation will assist you in validating your claim.

In today’s economy it is vital that your entire staff is onboard with the status of your accounts receivable. Don’t isolate the potential negative effects the current downfall can have on your company as a whole. The following measures could have a profound impact on your small business during these tough economic times.

• Let your team know the seriousness of the situation. Bring in the troops; find ways to work smarter, not harder.
•  Brainstorm at your staff meetings; encourage your staff to bring ideas to the table that will help minimize risky receivables. Don’t disregard ideas that are out of your comfort zone; for example, if you have a sales staff that solicits business out of house, ask them to give each new client (that isn’t paying upfront) a credit application. Prequalify prospect before signing them on as a new client; check their creditworthiness.
• Examine your aging report; identify at risk accounts – if you send reminders or late notices once a month, modify your procedures to execute follow-ups every two weeks.
•  If your billing cycle is once a month, implement a new procedure for including an invoice with every delivery or issue invoices once services are rendered.
• When your staff delivers an order, ask that they have the receiver check in the order and sign off on each item to ensure the order is accurate and accepted.

These are just a few procedures that may assist in minimizing past due receivables. Remember, you can’t pay your own creditors with money that is tied up in uncollectible receivables; the sooner you address delinquencies, the better your chances of recovering your money.

There are two types of credit applications; those specifically designed for commercial use and those intended for consumers. Contingent to your type of business, you will require one or the other; or in some circumstances both.

A business that caters specifically to businesses (Predominately B2B Suppliers or Service Vendors) should harbor a commercial credit application aligned with their credit policy. An efficient commercial credit application will request the following information:

• The Applicant’s Name, Business Address, Phone Number and Fax. (May also include an E-mail Address or Cell Phone Number for Additional Contact Purposes).

• The Applicant’s Legal Identity (e.g. Corporation, LLC, Partnership, or Sole Proprietor).

• The Number of Years the Applicant Has Been In Business.

• The Business’ Banking Information (e.g. Banking Institutions and Account Numbers Associated with the Business).

• Bank Location: Address and Phone Number.

• D & B Rating - Dun & Bradstreet

• A Minimum of Three Trade References (To Include Verifiable Contact Person – No Personal References – Business Name, Business Address, Phone Number and Number of Years Associated With The Business – 1 Year Minimum Association Required).

• Signature Line (Signature Required To Process)

Consumer credit applications are very much the same, but omit some of the specifics related to businesses. The following is an outline of what and effective consumer credit applications will include:

• The Applicant’s Name, Physical Address (No P.O. Boxes) and Phone Number(s) landline & cell.

• Number of Years At Current Residence (If less than 3 years – previous address’ for the past 5 years should be required).

• Define If The Applicant Rents or Owns The Residence.

• If The Applicant Is a Tenant, Reference the Landlord’s Address and Phone Number (contact information).

• The Applicant’s Employer with Contact Name, Address and Phone Number.

• Number of Years the Applicant has been employed With the Company.

• Social Security Number.

• Copy of Valid Driver’s License Or State ID (To Include the State Issued and Expiration Date).

• Applicant’s Banking Information (e.g. Banking Institutions and Account Numbers).

• Bank Location: Address and Phone Number.

• A Minimum of Three Verifiable Personal References (No Family References) To Include Contact Name, Address and Phone Number.

• Signature Line (Signature Required To Process).

Verify all Applicants’ credit worthiness with one or all of the credit reporting services:

• TransUnion

• Equifax

• Experian

Verify all references; either trade references or personal references (e.g. Contact Name, Address, Phone Number and accuracy of information given).
In the event credit is approved, the Applicant should receive a copy of the signed credit application, approved credit limit and payment terms. Ask the Applicant to read the application then verbally reiterate the credit limit and payment terms to include the consequences for late payments. Require the applicant to initial each segment to verify it has been read and agreed to.
The credit limit will depend on several factors (e.g. the credit worthiness of the applicant, the number of years in business and information acquired from references, to name a few).

If you don’t have a credit application or would like to see an example, please feel free to visit South Coast Revenue online. The credit application is in PDF format to make it easy for you to download or use as an example in creating your own.

Have you ever been thoroughly impressed with an applicant after conducting an interview? They looked great on paper… they had all the right answers during the interview process (provided you asked the right questions); their references checked out… You’re pumped! You’re excited! This is the one! Until they fail miserably at the job. Big let down right?

Let’s face it… we’ve all had a let down or two after hiring what appeared to be the perfect candidate for the job!

It’s really quite simple to find a potential employee that knows how to do the job; the better question is… Do they like the job? In today’s economy finding a good job can be a challenge. As a result, job seekers tend to go for the gold… If they have a choice between two jobs they can do (the operative words being “can do”…) it’s likely they’ll go for the job that offers the best salary… benefits… hours… you get the picture. The job they choose may not necessarily be the one they like; more than likely it will be the one that offers the best perks. Ultimately, if the applicant can do the job, but hates what they do, they will undoubtedly fail.

This scenario is particularly true in the debt collection industry. After all… how many people do you know that say “I want to be a bill collector when I grow up!?” I have to tell ya… that wasn’t exactly my idea of the ideal job when I first embarked into the business emporium!

Rare breeds of individuals qualify to be the ideal candidate for a potential debt collector or accounts receivable clerk who will be responsible for the debt collection aspects of the job. The ideal candidate for this position would be an individual that enjoys helping people and possesses great problem solving skills; a person who can identify the root cause of the problem and take the appropriate actions in resolving the issues quickly.

Here are some questions to ask during the interview process for a potential debt collector or accounts receivable clerk:

• Tell me about your strengths; what can you contribute to our company?
• Tell me about your weaknesses; how did you overcome these shortcomings?
• What do you typically include on an invoice?
• What accounting software are you familiar with?
• How do you handle discrepancies?
• How often have you negotiated payment arrangements? And how do you go about it?
• How often do you review aging and DSO reports?
• What were your job functions in your former position?
• How long has it been since you actively collected on past due accounts?
• What do you enjoy most about the position?

Invite the applicant to perform a self assessment. Beware of the potential candidate that offers a lot of vague “fluff answers” such as hard working, loyal or committed. These types of responses are typically unverifiable and lack the applicable answers that are directly related to the position they have applied for. If you receive responses such as these, ask the applicant for specific examples; invite the applicant to evaluate what a former employer might say about their work ethics.

Debt has always been considered a four letter word; and debt collection has always attracted a critical audience. Whether the recipient of a debt collection attempt is a consumer or business the end result is the same – Unwelcomed!

It’s inescapable; debt collection is and always will be essential. It’s the difference between success and failure. Not everyone pays their financial obligations willingly and those that do are no different from the rest of us – things happen and challenges present themselves. That doesn’t mean debt collection has to be compared to pulling teeth.

So how do we undo this debt collection quandary? The best way to minimize the adverse affect of debt collection is to have preventative measures in place; strategies that minimize the likeliness that debt collection will be required.

Any business that extends credit (accepts any form of payment other than cash upfront) must qualify their clientele for lines of credit. I realize that it’s hard to turn down business; particularly in these unstable times. But hey, if they don’t pay how does that benefit your business?

Start by implementing a few standard procedures…

• Have prospects and new customers fill out a credit application
• Check Trade References and Bank References
• Find creative ways to work with those who don’t qualify for credit
• Offer discounts or perks for bulk orders or extended services

The bottom line is to generate business that will help your business expand, not drown it in debt. Businesses that are experiencing challenges in collecting past due revenues are jeopardizing their business’ financial well being. There’s an old adage that holds true; “Money makes the world go around” and nobody knows that better than entrepreneurs.