Collecting unpaid accounts
Chasing unpaid accounts is very important in managing credit effectively. It is a skill you must master if your business is to survive financially.
To begin with, you should try to minimise the time between issuing an invoice and receiving payment, without damaging your relationships with customers.
Options include offering discounts, imposing credit charges and chasing payments. But if you can spare the time, nothing beats calling in person to collect a cheque, especially if the debtor has other customers who might overhear a request for payment.
These steps, suitable for all businesses, should be used to collect monies owing to you.
Day 1 Invoice your customer.
Day 30 If payment was not received, send a statement.
Day 45 A reminder notice is sent.
Day 55 Telephone your customer asking for payment.
Day 60 A final notice should be sent stating that if payment is not received within seven days, the account will be assigned to a collection agency.
If you’re still unsuccessful, it’s time to take further action – see a collection agency.
You may wish to assign the account over to the collection agency after the account remains unpaid for more than 90 days. The collection agency will collect the account for you.
The collection agency then keeps a portion of the money collected leaving you with balance of the total amount that you would not otherwise have received. And if the account goes uncollected, the agency will not charge you.
Don’t agonise over unpaid accounts. Take action and get the money where it belongs – into your bank account.
From a legal point of view, make sure the customer is fully aware of your payment terms. These should be given to your customer during the initial meeting or printed on the reverse side of all invoices. Perhaps for larger account, get your client to sign an agreed set of trading terms.
In the event of legal action, there can be no dispute that the client was not aware of your terms and conditions.
Dos and don’ts of chasing debts
Do…
Ward off collection problems with an early dose of thoughtful friendliness. (Eg. attach thank-you stickers to initial invoices) This may cut the need for subsequent collection calls.
If your debt is unpaid, send a reminder letter. This may be taken as a polite reminder. If no response is forthcoming, you will need to call.
Before you place a call, get yourself into a positive frame of mind. Visualise yourself and the customer having a positive interaction. See the customer wanting to pay you. This will definitely come across when you call.
Begin with questions, not demands. Your first call should be to find out what the situation is. Begin with something like: “We believe we delivered you these items and that there is payment due. Can you help us understand where things might have gone wrong?” or “We noticed that your invoice is X number of days old. We want to make sure that you received the invoice, that you are happy with the service you received, and if there is anything else we can help you with.”
Emphasise listening skills. Once you pose your opening question to the customer, you should listen. You have to be able to listen to and understand customers and be able to convey that to them.
Use communication and negotiation skills. Once you understand the situation and can offer a resolution, you need to state the resolution clearly to the customer, reach an agreement on payment terms and sell the customer on the benefits of complying with the terms. If your call goes unanswered or without success, you may have little choice but to personally visit the customer. Let them know when you are coming so that they can have a cheque ready for you to collect.
Don’t…
Delay – debts get harder to collect the longer you wait. After 60 days, most debts become difficult to recover.
Argue – arguing with the debtor simply allows the debtor to become more rigid. Frequently, it will get you off track and involved in irrelevant matters.
Phrase questions in a form that suggests that the debtor may refuse the information. For example, ask the debtor, “Where are you working?” as opposed to “Would you give me your place of employment?”. Phrase the questions in a way that invites the response you want.
Lose your temper – it is not necessary to raise your voice or become argumentative to get attention. Sometimes it is better to speak more softly or slowly. A deliberative change in the tempo of the delivery is quite effective.
Be negative – written correspondence to a debtor should be written in a positive manner, identifying the problem and directing the debtor to take a specific action (short, simple and direct). Letters that are unnecessarily harsh or negative could further infuriate the problem. Be cautious as to what you state in the letter since you can never be sure who will actually read the letter and it can be used against you in the future.
Threaten – Threats are not the only means of attempting to obtain payment. A party may be motivated by being advised of the benefits of making prompt payment, such as the protection of his good credit record and the continued supply of a good service or product.
Target Collections
To assist in debt collection, you should establish a target collection each month and perhaps offer responsible employees incentives for reaching the monthly targets (such as free theatre tickets).
The collection targets should be accompanied by debt recovery procedures, so that your customers are not confronted by over-zealous debt collection. You want to maintain your customer base.
Also be aware that employees will be tempted to go for soft targets and leave more difficult debts to age.
Collection targets are often set in terms of age of debtors, such as:
- 50 percent of debtors collected within 30 days of invoicing
- 30 percent of debtors collected within 60 days of invoicing
- 10 percent of debtors collected within 90 days of invoicing
- 10 percent of debtors collected after 90 days.
You will have bad debts, but if this is set at one to two percent, that may be considered reasonable.
Your rights when you aren’t paid for your goods or services
Unfortunately, there will be instances where you will not get paid. So in addition to normal debt-recovery mechanisms, you have certain legal rights over goods included in the contract. These include:
- Lien
A lien is a legal right to retain ownership of goods which form part of the contract until the price has been fully paid. Therefore, in your sales contract, you should have a “retention of title” clause in respect of your goods.
You cannot retain goods belonging to another person owing you a debt, only those goods relating to your specific contract with the business.
You should also note that once you let the goods out of your possession for any reason, you cannot later seize them again as security for the same debt.
- Withholding delivery
If the buyer defaults on a deposit or other payments, if you still hold the goods, you may retain possession of the goods.
- Stoppage in transit
Where the buyer defaults on payment or other contractual terms, or say, becomes bankrupt while the goods are in transit, the seller has the right to stop delivery of the goods.
In all these cases the seller retains the rights to sue for damages under contract law remedies for any losses incurred.
Debt collection agencies
Some businesses operate as debt collection agencies. While agencies vary, most charge an annual subscription and a commission on debts recovered.
Most also provide information on the status of debtors, carry out credit checks and sometimes tracing services for absconding debtors. Your trade association may also be able to help.
The agencies operate by sending a graduated series of letters and making telephone calls, sometimes taking the matter as far as legal action.
Most claim a 70 percent or more success rate in collecting debts. This is quite an acceptable achievement given that most debts are aged by the time they are handed over to agencies.
Whether to use an agency depends on your in-house debt collection success and how comfortable you feel when chasing debts yourself. Agencies are probably worthwhile for dealing with a small number of recalcitrant accounts.
Once an agency is involved, any goodwill the customer retained to you is lost, but losing
the goodwill of bad payers should cause you little or no concern.
Make sure agencies obtain your approval before incurring charges for legal action.
Factoring the debt
You can actually sell the trade debts of the business to a factoring company which will pay you for the total of the outstanding debts, less an amount representing the factoring company’s commission (risk) on the transaction.
The factoring company collects the debts and takes on the risk of not recovering all the amounts due. As these could be substantial, factoring is more expensive than a debt collection agency, but the benefit is that you get paid immediately. Factoring companies usually take the good payers as well as the bad payers. It’s not a way of handling a few bad payers.
Beware: Customers and suppliers may view factoring as an indication that your business is in financial trouble. Even if this is not the case, you can do little about perception.
