There are multiple aspects to running a business, but the bottom line is you provide services or products to customers in exchange for payment. While the average business customer pays their bills on time, there are always those who either cannot or will not pay their debts.
There are many reasons why customers fail to meet their financial obligations, and financial and personal hardships often top the list. Unfortunately, non-payment of business-to-business (B2B) debts can put the success of your company in jeopardy. You need working capital to cover operational expenses and purchase inventory; when customers fail to pay, this much-needed cash is tied up in your accounts receivable. Like it or not, debt collection is essential to the health of your business.
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Debt Collection and Cash Flow
For many small businesses, debt collection is an integral part of their cash management strategy. The faster they receive payments from debtors, the more cash they have to purchase inventory and grow their business.
Knowing who owes what and when will help you identify slow-paying customers and adhere to a strict schedule of sending invoices, reminders, and overdue notices in a timely manner. Consider offering incentives such as discounts for customers who pay early. When a customer fails to pay an invoice before its due date, the amount owed increases as a result of additional interest and late fees. Therefore, the longer a debt goes unpaid, the less likely it is to ever be paid.
A Strategy to Speed Recovery
Create a collections process with set policies and make sure everyone involved sticks to them. Our customers will often establish guidelines that state at 30 days they send a written reminder; at 60 days a junior staff person calls the customer; and at 90 to 120 days the owner picks up the phone. While you may have requested payment from the customer numerous times without results, a call from the top executive is likely to be taken more seriously.
Senior executives should always handle collection calls where you’re demanding payment. At this point, it’s critical to involve decision makers who can resolve any lingering customer issues and generate a positive outcome.
Keep in mind that the collections process can be a learning opportunity. Keep all of your communications friendly. When making calls, ask if there is a problem with the product; if there is, request a credit from your vendor. You can also find out how well the product is selling and uncover leads for new business.
Ultimately, you may have customers who simply refuse to pay their debts. Harassing them can expose your company to unnecessary trouble and even damage your credibility as well as your business relationships.
Many business owners will opt for outside help to recoup their losses. Outsourcing to a third-party firm or a commercial collections agency relieves you of having to constantly pursue payment of unpaid debts, allowing you to focus on day-to-day operations.
Collections agencies specialize in recovering debts that are past due, typically by 90 days or more. They rely on various forms of communication to reach customers and persuade them to pay, including phone calls, letters, and emails. In some cases, they turn to the legal system to collect if other efforts are unsuccessful.
Good collections agencies are effective in recovering debts because they understand which strategies are most effective. However, there is a reason the industry has gotten a bad rap. Some agencies rely on unscrupulous, even illegal, tactics. This is something to avoid at all costs because it reflects poorly on your business. There are strict laws surrounding collection efforts, and any respectable agency will follow them.
Finding the Right Fit
There are thousands of collections agencies to choose from, and they are not all alike. Some handle consumer accounts, while others handle B2B collections. Some agencies specialize in certain industries, while others cater specifically to small or large businesses.
If you’ve decided to hire a collections agency, we suggest that your first order of business is to get clear about your end game. For example, although Summit Financial Resources is not a collection agency and does not provide debt collection services, when dealing with financed invoices our employees focus on information gathering rather than threatening legal action. We ask if the customer has an invoice and where we can we send it if they don’t. We also determine if there have been any product-related issues, such as whether or not the product was received and if there was a problem with the quality.
Once you’ve determined the outcome you’re looking for, do your research to understand what separates the good collection agencies from the bad. Focus on finding a firm that is professional, ethical, and has an established track record in your industry. Here are a few more tips to help you narrow down your options:
- Ask for referrals from your attorney, accountant, or trusted business associates in your industry.
- Search the ACA Directory to find member agencies that are licensed in your city or state. The Association of Credit and Collections Professionals is a nonprofit organization that establishes ethical standards for the industry and requires its members to adhere to them.
- Check the Better Business Bureau for ratings on agencies you are considering. Multiple complaints should be a major red flag.
- Make sure the company is state-licensed and/or bonded, if applicable. Many states require one or both.
- Find out where the agency is licensed. If you only do business locally, an agency that is licensed only in your state is fine. If you have customers across the country, find an agency that is licensed in all states that require it.
- Don’t worry about size. A large, national firm is not necessarily a better fit than a small, local one. It depends on your needs and the agency’s strengths, reputation, and track record.
- Pay a visit. There’s a lot you can learn about the agency simply by talking to them face-to-face. Find out which tactics and technologies they use in their collection efforts and ask to see proof of results. Ask for references and take the time to check them. If the company doesn’t seem like a good fit, trust your instincts and move on.
Summit Financial Resources is here to help you take advantage of opportunities to improve receivables as well as navigate any shortfalls. We support the growth of your business by helping you develop stable customer relationships and ensuring that you have enough cash to meet current obligations and handle the unexpected.
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Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.