Collect from delinquent customers

As business slides south, it's getting tougher to collect receivables. Your business customers are probably feeling the pinch, just like you, and either can't or don't want to come up with the cash they owe. What can you do?

As business slides south, it's getting tougher to collect receivables. Your business customers are probably feeling the pinch, just like you, and either can't or don't want to come up with the cash they owe.

It's a vicious domino effect: customers' cash flow troubles makes them delay paying on time, or as their business sinks, makes it impossible for them to keep up with bills. This, in turn, puts your business on shaky financial ground, so you put off payments to your creditors.

How do you get your customers to pay?NO

It's not as if you don't know better--experience has taught you that the longer an invoice goes unpaid, the less likely you are to see the money. You regularly run accounts receivable aging and collections reports from your accounting software so you can quickly identify delinquent customers. You also make a phone call as soon as a customer is late with payment.

But what then? What if that phone call--or one or two or three others like it--doesn't bring in a dime? You need to put more pressure on customers to pay. I've got two methods that will help light a fire under your customers, and get them to pay what they owe. You've called not once, not twice, but more times than a telemarketer hustling Florida marshland. But this customer keeps giving you one excuse after another, or promises to pay but then never puts a check in the mail.

The telephone's plainly not working. You need to turn up the heat.

Delinquent customers typically respond better to a written document than they do to phone calls. Unlike a phone call, which when over is over and done with, a letter is a permanent reminder that the client owes you money. It's also a more formal, sober kind of communication which, subtly or not, impresses on the customer the seriousness of the situation, even when the letter's content remains cordial.

Crafting such letters is the tough part. Should you strike a friendly, familiar tone with a long-time customer, or get gritty with a new client? Cajole or threaten, whine or promise legal action?

The unsure entrepreneur can turn to a slew of supportive services and software. Since the '99 version of QuickBooks Pro, Intuit's accounting package has included Microsoft Word templates that generate collection letters to customers. I use the newest version, QuickBooks 2001 Pro, and have at times turned to its Write Letters wizard (available by using the Write Letters command in the Company menu).

QuickBooks includes three collection letters, each a bit tougher in tone than the last. These templates use the data from QuickBooks, including the name of the customer, the invoice number, date of invoice, and amount, to fill in the template.

You can find more ready-made collection letters in anthologies of business correspondence templates. The trial edition of WriteExpress Easy Letters 2001, for instance, includes some 2,000 templates that work with Word and WordPerfect--among them a six-letter series of collection notices.

You can also try an online fill-in-the-blank demand letter at Nolo Press. (A demand letter is simply a clearly worded document that spells out the dispute.) Although it costs around $10 to crank out a demand letter here (when I wrote a demand letter last week Nolo had a sale, and the price was just under $8), that's a lot cheaper than having a lawyer draft a forceful letter. Make sure that you state a deadline in the letter--15 days is reasonable--for payment to be received. Tell the customer that if you've not been paid by that date, you'll turn over the account to a collection agency.

A letter will usually gets the deadbeat's attention. If it doesn't, and you've exhausted all other avenues, consider hiring a specialist: a collection agency. Finding a reputable one is your next chore, and my next step. Your patience has melted away like a portfolio packed with dot-coms. You couldn't care less if you never do business with this deadbeat again. So haul out the big guns.

By turning the collection chore over to an agency, you're kissing this customer good-bye--collection agencies aren't known for their diplomacy. Still, they may get you a piece of the money you're owed. Most collection agencies work on commission--20 to 25 percent of the amount recovered is normal--so if they don't collect, they earn squat.

But rating an agency strictly on the cut it takes isn't the smart way to sniff out a credible collector. The Commercial Collection Agency Association (CCAA), which represents bankruptcy lawyers and collection agencies that specialize in getting money out of businesses (as opposed to those which dun consumers for, say, overdue bills), recommends that you pay closer attention to the agency's average net back. That's the amount actually returned to the company (money collected minus agency fees). Agencies that charge higher fees are worth the extra cut if they typically collect on a bigger chunk of the debt.

Let's say Agency A charges 20 percent but manages to collect just 10 percent of a $20,000 debt, while Agency Z collects 20 percent but levies a 25 percent commission. That means Agency Z is the better pick, because its net back is $3,000; Agency A's is just $1,600.

Picking a reputable collection agency is crucial. The CCAA is one resource for that task, since its membership requirements are extremely stiff: members must include a $300,000 surety bond, maintain a separate trust account into which all collected monies are deposited (and the account is verified twice a year by the CCAA), and show at least a five-year lifespan. The member directory is accessible from a link on the front page of the CCAA's site.

The American Collectors Association (ACA), another group of collection agencies, has looser membership requirements: an agency only needs to have been in business for one year, for example. Click to the ACA's membership roster to view ACA members by state.

State regulatory agencies can also help you separate the dependable agencies from the fly-by-night operations, at least in those states that regulate collection agencies. Unfortunately, only a slim majority of states do this. In my home state of Oregon, the Division of Finance and Corporate Securities oversees collection agencies, which, among other requirements, are required to post a $10,000 bond to prove their financial stability.

Collecting money is far from fun, but it's a necessary evil when you're in business for yourself. Especially when you have to turn up the heat by mailing harsh letters or putting an agency on someone's case. After all, it's your money you're after.

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