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Sell on credit? Then you know that approximately 3-7% of the companies you extend credit to don’t pay.

It’s simply the cost of doing business.

Yet when these invoice amounts reach the tens or hundreds of thousands of dollars, it can seriously impact your cash flow and bottom line.

But, as an accounts receivables manager, you also understand that collecting is a tricky part of business operations.

If you’re too lenient with bad debt, it can add up and your company could go bankrupt. But act too strict? Then you could alienate lucrative customers who may have just hit a rough patch and needed a little flexibility.

Either way, the wrong collections approach could hurt your company – and your career.

What are your options? Here are three steps to recover your business's debts more effectively:

Step #1: Deal With Late Payments Quickly

 

You should be regularly issuing invoices and statements as a part of your credit control process – before a payment is late. However, once a customer fails to pay you on time, you need to take fast action.

Why?

According to the Commercial Collection Agencies of America, the probability of collecting on delinquent accounts drops dramatically each month after the due date, from 81% after two months to 52% after six months. That's a 29% drop in just four months! So the sooner you act, the better your chances are of collecting on an unpaid invoice.

Deal with Late Payments Quickly

When it becomes clear a customer is late with your payment, you should call them immediately.

Admittedly, calling late payers can be awkward – especially if you've had a good relationship with the customer until now. However, at this stage, it’s the most effective way to chase a late payment. Customers can ignore emails and letters, but they can’t dodge your questions in real time on the phone. (If you have to leave a message, don’t state it’s about a late payment.)

When you do get your customer on the line, expect excuses and delay tactics, and be ready with responses them. Here are some common reasons for late payments, along with a few rebuttals you can offer:

Customer: I put the check in the mail yesterday.
You: Wonderful! Can you give me the check number, amount and date on it so I can make sure it gets posted to your account correctly?

Customer: I didn’t get the invoice.
You: No problem! I will email it to you right now. Can you mail a check today? Or I can take a credit card over the phone.

Customer: My company is having a cash flow problem.
You: You’ve been a good customer for a long time, so we’d certainly like to offer some flexibility. Let me set you up on a payment plan and then you can just make a partial payment today.

Sometimes polite reminders aren’t enough and the money you’re owed isn’t forthcoming. And remember, as the account ages, your chance at collecting is decreasing by the day. In addition, it’s costly for your company not only to carry these unpaid debts, but to try and collect on them, as well.

What’s the answer? If your customer doesn't follow through on their commitment, then you need to take a different approach. After 90-120 days, you need to reach out to a commercial debt recovery firm for help.

Step #2: Outsource Bad Debt to Recovery Experts

 

Outsource Bad Debt to Recovery Experts

A professional debt recovery firm is trained to overcome delay tactics and late payments like the ones listed above. They're experts at dealing with experts in avoiding debt. In fact, the right firm can:

  • Coordinate an entire network of private investigators – who can be on your case in a matter of hours – to research the debtor company and why they aren’t paying.

  • Conduct asset and liability investigations to locate any missing or hidden assets, and determine if the debtor has the resources to pay your business.

  • Employ more effective strategies based on years of collections experience in order to motivate the debtor to pay you.

Give you access to expanded resources, so your business's chances of collecting on an aging account are far greater.

Worried about your reputation if you work with a debt recovery firm?

Think of it this way: Using a recovery firm can be a less confrontational way of chasing unpaid invoicesthan taking court action.

A reputable firm will know how to effectively and professionally go after late payments, without alienating the customer or damaging relationships.

However, ask yourself this:

Do you really want to keep a customer that requires you to constantly chase them to pay?

If you’re not sold on the thought of a collection firm, consider this:

The third-party debt collection industry returned some $45 billion to creditors and other clients in 2013, according to a study done by Ernst & Young. In many cases, businesses would have written off that money if it weren’t for the efforts of debt recovery firms.

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#3. Take Legal Action

 

Take Legal Action

When all else fails, court action is the final step.

But before you take a delinquent customer to court, be sure to ask your attorney about expenses up front. In some instances, the fees can outweigh the money to be reclaimed, especially if you’re uncertain the customer will ever be able to pay off the debt.

A reputable debt recovery firm can also help at this stage. Many have networks of attorneys and can pre-qualify your case to determine any liabilities before a suit begins, so your business can avoid additional losses. They also assist with filing liens so you can use assets to repay what's owed to you.

Deciding if and when to take serious action against a customer can be difficult.

However, once you've aggressively tried to collect for more than 90 days, you should consider getting help from a debt recovery firm. They can offer you a range of solutions to help you quickly recover the money your company is owed – all while you focus on other core business priorities.