You may be satisfied with accounts paying beyond your net 30 day terms. You feel comfortable thinking that 60 days is the norm in your industry and that all your accounts seem to get paid without you having to call them. Then you notice an account for a substantial balance beyond that 60 day period and heading over 90 days. It appears you may have to send the account to a third party for collection or to a lawyer. Where do you start?
The first step is to determine the reason for the delinquent balance. There are usually three major reasons why an account is past due;
• The customer wants you to work for your money
• There is a dispute or credit note request from the customer
• The customer does not have the money
In regards to the customer that wants to make you work for your money, you need to put down firm ground rules regarding when you expect payment. If the homework had been done with a proper credit investigation from a properly completed credit application, you would have discovered this customer type immediately and taken proper precautions. At 90 days or greater however, you need to let this customer know that you want to get paid and that you expect payment immediately. Call the decision-maker at the delinquent company and follow up with an e-mail, fax, letter or all three. If you do not get any contact or response from the customer, you may want to send a letter of settlement for two reasons; one it’s better to get 90% of something rather than 100% of nothing. The second reason is that should you end up having to sue the account; the courts will look more favourably on your argument since you tried to avoid a court date with the debtor by compromising.
In the case of a dispute or credit note, you should again review the customer notes and file. If the account is a customer who constantly requests credit notes for insignificant reasons, you may want to take a firmer stance. You may know of some companies who lowball a quote on a project and then try to increase their gross profit by constantly seeking credit notes from their suppliers or delaying payments to them. If the dispute is legitimate, it pays to solve it as quickly as possible in terms of retaining the customer and establishing trust and loyalty.
The final scenario is the account that simply does not have the money to pay you. This is the most concerning scenario of the three. Once again, it is important to review the customer file. Does the customer have slow times during the year? Can you implement a payment plan? Remember that if you do implement a payment plan for the customer that the past due balance must decrease and not maintain the status quo. Perhaps if this cash flow shortage is a constant yearly concern you may want to reduce the customer’s credit line. This will not only reduce your exposure to a possible delinquency, but it will force the customer to forecast his cash flow better.
To sum up, you can probably avoid sending an account to a third party with a good collection policy, prompt follow up on past due invoices and documentation of all payment plans, disputes and overall correspondence to the debtor. Usually debtors will respond to a common sense argument when you have the documentation to back it up. Should you end up having to take the account to court, it’s just like in the court TV shows; the one with the best documentation usually wins the case. In some instances the court may award costs and past due interest. The most important thing is to follow through with your demands for payment. If you tell the customer you will be sending the account to a collection agency in 10 days, then do it; if not, the customer will not take you seriously. If you are not prepared to send the account to a collection agency, then don’t mention it in your correspondence. Remember to always get confirmation of your correspondence to the debtor with instruments such as proof of fax or a courier receipt.
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