Business owners face challenges on a daily basis. Unfortunately, many don’t plan proactively for one of the greatest challenges that most businesses eventually encounter. That is business debt collections.
Everything is fine and good as sales are being generated and the revenue starts coming in. However, many businesses are not paid cash, upfront for their products or services. Their customers make purchases on credit and when one of those customers fails to pay on time (or fails to pay at all) they are not prepared. The unexpected delinquent account can cause a lot of grief.
Here are the 5 biggest obstacles that business owners face when it comes to collecting past due accounts and the commercial debt collection process:
- Debtor Excuses – When a customer fails to pay their account on time, it is best to communicate directly with the customer, via phone or email, to assess the situation. Unfortunately, some delinquent customers are “professional debtors” and will throw all sorts of excuses at their creditors.Some reasons for delayed payment include: the billing was not received, cash flow is poor or there is a dispute. Businesses should have processes in place to deal with debtors. Anticipate debtor excuses for more effective debt collections. Falling for debtor excuses and stall tactics will only cause extra work on the creditor’s end.
- Customers Going Out Of Business – Businesses come and go but, unfortunately, many creditors do not expect their customers will go out of business. A strict accounts receivable management process and staying on top of B2B debt collections can mitigate the risk of bad debt.The process for extending credit to business customers should entail a rigid credit application process that includes credit checks as well as performing bank and trade reference verifications. The process should not end there. Routine re-verifications should be completed and credit limits should be re-evaluated.
Furthermore, as soon as a customer account becomes delinquent, it should be attended to. Waiting to collect the debt could allow time for the company to go under and the liable individuals to evade creditors. Regular communication can provide a much-needed heads up if a customer’s business is struggling and the account is at risk of not being paid.
- Bankrupt Customers – Once a business files for bankruptcy, creditors must stop their collection efforts. At that point, the bankruptcy courts will decide whether or not creditors will collect any outstanding amounts owed by the debtor. Secured creditors will have a better chance of collecting than unsecured creditors. However, there are steps involved with becoming a secured creditor that must be done from the start.Upon notification that a customer filed for bankruptcy, creditors should file the appropriate paperwork (including a Proof of Claim) with the bankruptcy court. The creditor may file the Proof of Claim directly, or with the assistance of a commercial collection agency or collections attorney. Bankruptcies can be very long and drawn out processes. Sometimes it takes years before creditors receive their money, if at all.
- Courses Of Action For Commercial Collections – There are several possible courses of action a creditor might take when an account becomes past due. One option is to send correspondence, which might include follow up statements, past due notices or debt collection letters. Other means of communicating with a customer about their past due account is to send an email or make a collection call.The initial contact need not be terribly aggressive until the situation has been assessed. What’s most important is that the creditor is prepared to act when the account becomes delinquent. Another course of action to take (and the 5th obstacle) is hiring a collection agency.
- Getting Help With Debt Collections – Creditors can take action as soon as an invoice becomes past due (usually after 30 days). However, many tend to wait much longer. The problem is that many creditors wait to long to find a collection agency and escalate the debt collection efforts. This decreases the likelihood of collection.Commercial collection agencies offer services to businesses to help them collect unpaid invoices. Traditional commercial collection agencies usually charge a percentage amount of the balance owed. The collection fees may be contingent upon the agency collecting from the debtor. Similar debt collection services are offered by fixed fee collection agencies, where a flat fee is charged for each past due account. The flat rate collection agency usually charges a low fee of $10 to $15, or less, per account.
Commercial debt collection services can be worthwhile for their expertise and resources. The key is knowing when to get help. The longer the account remains unpaid, the less likely it will be collected.
Businesses, large and small, can benefit by taking a proactive approach to commercial debt collections. Being prepared for the “unexpected” will help to save time, money and improve cash flow in the long run.
My name is Donna Moran. I am COO and co-founder of Ardso. Ardso offers commercial debt collection services to large and small businesses. We have a blog that offers tips and tricks for debt collections, A/R process improvements and more. My background is in finance and accounting. I have twenty plus years of experience working in Commercial Credit/Collections, Corporate Finance, General Finance and Accounts Payable. As a small business owner, I want to share my knowledge and experiences to be able to help other small business owners.