9 Steps to improve past due receivables collection rates

One of the greatest troubles small businesses face is cash flow shortage. It’s a pain when customers do not pay your invoices on time and collection rates suffer. Add that you have to call and remind them that their payment is overdue. On top of the unpaid receivables you also have to take time away from running the business, and that’s not good.

 

Improving Collection Rates

 

If you don’t know how to handle late paying customers, follow these steps. They will improve collection rates and save you further headaches.

 

Here’s the list:

1 – Know What You Want to Achieve
2 – Be Prepared
3 – Know Who You’re Calling
4 – Listen and Take Notes During Contact
5 – Be in Control, Firm but Kind
6 – Demand for Payment in a Professional Way
7 – Recap and Finalise the Terms
8 – Report Debtor to Credit Rating Agencies
9 – Debt Collection and Litigation

 

9-step process to improve receivables collection rates

 

1 – Know What You Want To Achieve

 

Don’t rush to the phone. It’s important you know in advance what you want to achieve from contacting your customer. Your end goal is to produce a concrete result.

 

To improve collection rates you must be ready to accept a promise to pay now or on a later date. But you must you get a definite commitment about how and when this happens. Note that there could be a genuine reason why the payment wasn’t sent. For example, your debtor may have a real problem with cash flow, so knowing this before demanding for payment helps you achieving your goal.

 

However, make clear that outstanding payments are a serious matter to you and you must stress all possible outcomes (see 8 and 9) if you don’t receive payment by the agreed date and terms.

 

2 – Be Prepared

 

To achieve your goal to improve collection rates, you must also have everything at hand about your customer. First, gather invoices, sales contracts and all the documents of the debtor’s account and review them.
Take note of:

 

– invoice number and amount
– outstanding amount (if different from invoice amount)
– payment due date
– disputed orders, pricing, complaints
– sales terms
– proof of delivery

 

Make a list of potential excuses the debtor may give to prevent them from shifting the topic of the conversation. This way you are in a better position to refute them one by one and keep yourself on track to achieve your end goal. Remember to keep your cool during the phone conversation to control it throughout.

 

Also, be proactive and see first thing if the unpaid invoice was due to a mistake of one of your colleagues. Maybe there was a dispute or delayed shipment you were unaware of. Give the chance to the customer to express their view. They may try to complain about your service but don’t lose track to improve collection rates because it’s your ultimate goal.

 

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3 – Know Who You’re Calling

 

In principle, your credit policy ensures you have all the information about your customers. Also, your credit assessment should have informed you whether the debtor was about to experience difficulties. So, it shouldn’t be difficult to access your debtor’s file to gather all you need.

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What you need is to know the person to call, their payments behaviour, their financial situation and any other elements to draw a clear picture of whom you are dealing with. Questions you should ask yourself:

 

Have they been a good customer?

 

How many times have they paid late?

 

How long have they been a customer?

 

4 – Listen and Take Notes During Contact

 

To improve collection rates collectors should remember to take notes of the phone conversation. Taking notes of everything you and the debtor discuss about is important because:

 

a) you must have up to date information about every aspect of your relationship with the customer
b) you can assess whether the debtor is willing to pay

 

You don’t want to call them back and start afresh as if the previous calls never occurred. A follow up call is a demanding task and takes valuable time you’d rather spend running your business.

 

However, it’s important to have a system in place when you call for payment and you should stick to it. Thus the importance of documenting your communication with the debtor.

 

When you do a follow up call to reiterate the need of payment, if that is the case, you don’t want to waste your time to recap everything. Rather, you want to use your notes to your advantage and make progress towards your end goal of collecting the money.

 

5 – Be in Control, Firm but Kind

 

The success of your collection attempts also depends on how you control the conversation. If you contact the debtor by phone, find out who answers the call and request to talk to the right person. Talk to the debtor with a pleasant and not aggressive tone of voice. Make a kind reminder to them of their outstanding payment.

 

If you met them in person during your Know Your Customer (KYC) connect with them with a personal tone. Your approach to the person should be friendly and showing you want to help and responsive to what they have to say.

 

Same if contact is via email. Make sure you set a positive tone to the message to avoid negative words. Use positive phrasing to convey negative news and offer to help so the other person doesn’t feel threatened. Be personable but maintain a firm and professional approach.

 

All this ensures you have control of the conversation and keeps you on track in pursuing your goal of collecting the full amount.

 

If the customer becomes aggressive, stay calm and don’t get upset with any abusive language. Keep taking notes and decide whether it’s better to call later. You’ll be able to resume from where you left while the debtor cooled off. The important is you advance step-by-step towards resolving your collection issue.

 

6 – Demand for Payment in a Professional Way

 

Having control of the conversation in a firm and professional way helps you demand payment to the debtor leaving them not much room for excuses. By pulling the conversation back to the need of due payment they don’t have any other alternative than agreeing on paying you.

 

You should acknowledge any reasons why they haven’t paid while you prepared for the call. While you want the debtor to pay the full amount now, they may have a genuine reason for not being able to honour the debt. Always assess how important is that customer for you. You may want to keep doing business with them.

 

If the debtor is unable to pay, offer a payment plan they can afford and give them your bank details where they should wire the money. Try to make the plan work for you too. Your goal is to commit the debtor to a full payment in the shortest time possible.

 

Keep the communication channels open to ensure you make progress on that. Clearly state what you expect from them on the agreed date whether it’s a promise to pay or payment plan. Don’t let the debtor get away with your money.

 

If instead you feel the debtor doesn’t want to pay or avoids your request to commit, make clear the potential consequences (10). A non-paying customer is not a customer.

 

Collectors should remember to take notes of the phone conversation. Click To Tweet

 

7 – Recap and Finalise the Terms

 

You now reached the stage where you can summarise everything you discussed and about the payment arrangement. Specify when and how debtor should pay and the conversation result in commitment to pay.

 

For example, if they send a cheque or make a wire transfer ask them to call or communicate it to you via other appropriate medium. Also your notes will serve you to confirm in writing what you just restated over the phone. Thus, write an email to debtor as soon as you end the conversation.

 

Don’t forget to warn the debtor about the consequences of non-payment and that you would treat that occurrence as a serious matter.

 

8 – Report Debtor to Credit Rating Agencies

 

There are consequences if the debtor doesn’t stick to its promise and doesn’t pay. If you are in the US, you can report your debtor to one of these credit reporting agencies:

 

Dun & Bradstreet
Equifax
Experian

 

Credit reporting agencies (or Credit Bureaus) compile information about companies and their credit to produce a business credit score. This credit information comes from banks, finance companies, legal and public records and they resell it to other companies. If you apply for credit with a bank, they will have the right to access your company information.

 

Process of Business Credit Reporting System

 

Therefore, if a company wants to do business with suppliers, it’d better avoid legal proceedings, bad payment history or bad debts affecting its credit score. Note that credit bureaus process information about your company independently from each other and have their own credit scoring calculation methods.

 

They also offer complementary services for your business. For example, you can get notifications of improved customers’ credit scoring. This way you can re-activate suspended accounts and pursue improving your collection rates.

 

You can also report the business to the Better Business Bureau (BBB) which deals with disputes about businesses. Only report to BBB if you still want to avoid legal action because this is the ultimate solution to get your money back.

 

Remember that a fundamental part of improving your collection rates and get paid is to be persistent with the debtor. Further, you are competing with other suppliers demanding payment from your customer. You must convince your debtor to put you in the priority list of creditors.

 

And how you do this?

 

You persist in following these steps and iterate through them until your outstanding receivables are paid.

 

9 – Debt Collection and Litigation

 

You reach this stage if all your efforts and attempts to collect the money have failed, despite your warnings about non-payment. In some cases, your debtors may suddenly agree to pay if you threat them with reporting their company to the above credit agencies. If even this doesn’t work, your only option is to hire a debt collection agency or a collection law firm.

 

The collector will contact the debtor and suggest immediate payment before initiating legal action. Debtors may find this quite threatening because a legal action means the probability of losing assets and damaging the business.

 

It’s difficult to get to this stage without an adequate plan. Hiring a collector requires investigation, selection, filtering and checking the collector’s professional standing, certifications, training and licenses. Also, in some countries and US states you must check whether they possess surety bond, which is a protection against professional negligence. You must ensure you know who you are handling your files to ensuring you stay within the law too.

 

If the collector is unable to recover the money amicably and you are forced to go legal, first ensure you have all documents supporting your claim ready. In every business deal it’s important to maintain proper documentation about the customer. If you export, you must also get documents signed because in certain countries this is what a law court will ask you.

 

Conclusions

 

Improving collection rates is a process that should be in place for the credit department, whether you are a solo-preneur or a well structure business entity. You don’t need great resources to go through these steps but planning is always a good way to prevent non-payment issues. For example, decide how to grant credit to new customers by requesting credit reports.

 

Calling late payers is not a pleasant thing to do but it’s necessary because your receivables are your main assets. Without them you risk to lose your business. Use these steps as a system and you’ll see that collection rates will improve over time.

 

However, for really bad debtors you must also have a last resort solution. Debt collection is not a company’s job but one to hand over to a professional. Outsourcing this process to a debt collector will increase your chances to recover your money and ultimately contribute to your collection rates. No doubt about it.

 

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This article contains general legal information and material for informational purposes only which are not intended and should not be taken as legal advice. Recoupera is not a collection agency and it is not a law firm or a substitute for an attorney or law firm. All informational material provided may not reflect changes in the law. For legal advice, contact a lawyer.

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