Many companies are carrying customer accounts that are still outstanding after 60 or even 90 days. Sometimes this is acceptable if that’s the arrangement they’ve made with the customer and planned for in their budgeting. But when an outstanding account gets beyond reason you may have to bring in external agents to help collect the debt.
Debt collection experts have identified four ‘triggers’, apart from lateness, that are definite indicators that the time has come to call in the professionals:
1. More than one broken promise of payment.
2. More than one lie about payment having been made.
3. A cheque that’s bounced more than once.
4. A change of address with no forwarding notice.
It’s reasonable to give a debtor one chance to pay up. If they repeat a broken promise, a lie or a bad cheque, they’ve had their chance. And if they move without telling you, they’re probably hiding from you and other creditors. Your best hope of getting paid in these circumstances is to use the services of a professional collection agency.
Working with a collection agency
To do their work collection agencies need documented information from you that will enable them to recover the debt, or as much of it as possible:
1. Accurate records of the transaction and when the debt was incurred. This could be a purchase order or a letter requesting supply, together with your paperwork that proves the goods or services were provided.
2. Copies of the original invoice, plus all the statements you’ve sent that refer to this invoice. If you have proof of sending them, such as a post office receipt, this will help prove that you have gone through the normal processes of requesting payment.
3. Any correspondence between you and the customer regarding the debt. This can include letters, emails, faxes and even notes from telephone conversations you’ve had with them.
4. Records of past transactions with the customer that show what they’ve previously purchased and how and when they’ve paid for their purchases.
Prevention is better than collection
It’s not just that outstanding accounts are costing you money in lost interest and other carrying charges. The process of actually chasing late payments and dealing with bad debt itself is estimated to be costing the SME sector huge amounts each year.
Yet, despite rising cash flow pressure on SMEs, most are still failing to adequately protect themselves from bad debt. Many have no provisions at all in place for an unexpected increase in bad debts and are thrown back on using their bank overdraft facility or covering cash flow shortfalls from their personal savings.
The reality is that chasing payment and dealing with bad debt is a fact of business life and that what you need is a strategy to minimise the extent and impact of having to do it. It should start when you first deal with a customer. All new customers should complete a credit application that includes their company name, the names of directors, how long they’ve been trading, their address and other contact details, as well as a minimum of three referees with whom they’ve established credit.
At the time the application is taken, the customer should be given a written summary of your credit terms that state a credit limit, a term for payment of any outstanding amounts, and the interest rate you’ll charge on debts that exceed your credit terms. If you don’t already have a written summary of your credit terms, this is a good time to create one.
Summarise your credit policy on every invoice and statement, and note that any errors or other issues that relate to a dispute over amounts must be raised with your company within two weeks of the date of the statement.