For a small business, sending an account to a collections agency is an absolute last resort. After all, the relationship is already ruined, and it takes time and money. Wrong.
By Dean Kaplan
More often, whether you’re an entrepreneur or a small 10-person team, companies of all sizes see that moving unpaid invoices to collections is an ideal way to get paid. It’s also a good way to retain a customer relationship.
Preserving the customer relationship is essential because it is much easier to save or resurrect a client, even one who once owed you money than it is to find and sign a new one.
In collections, it is essential to collect money quickly. As this chart from the Commercial Law League of America illustrates, the longer an invoice goes unpaid, the lower the chance of payment.
Collecting money is not only excellent for your business financially, but it’s also essential to saving your client relationship. Owing money and being owed money are both stressful positions. When a customer owes you money, you may stop rendering services. You may follow up, but the customer may avoid your calls or emails. On a rare occasion when you reach the client, you find yourself annoyed and angry. In the meantime, the client looks elsewhere, hires someone new and develops other relationships. A positives experience with a new vendor may mean the client no longer wants to repair your relationship. As a result, the incentive to pay your old invoices decreases.
Small businesses frequently make the mistake of ignoring past due invoice for months or don’t address a specific dispute issue with the client. To avoid collections, a company may make a settlement offer, but not use the correct language. Other time, someone untrained in negotiations gets emotional and says things that make the resolution more difficult. Now, the situation is even worse.
Debt collectors are trained to deal with these issues in a professional way that prevents hard feelings.
When we work with small businesses, there are four steps we recommend in the collections process:
- On average, when an account is 15 days overdue, suspend your client’s credit. Of course, this depends on the norms in your industry and the information you have about your client and their issues. Fifteen days might be too soon or too late to take this action.
- You or the internal accounts receivable department distributes a follow-up letter, fax, email and phone call outlining your collection procedure. This is something that every business should set up before it is needed.
- When an account is 90 days past due, it is automatically turned over to a qualified collection agency. Remember, when an invoice is 90 days overdue, the ability to collect on it goes down. Reputable collection agencies only get paid when they collect, so as a small business or solo entrepreneur, you have little to lose by sending the bill to a collection agency.
- You tell the collection agency that while collecting is the highest priority, preserving the relationships is essential. Only use highly trained collectors on these accounts.
On average, over 70% of claims are collected within 30 days of placement with an agency and over 60% of these return as customers within 90 days. Over 85% of all claims are collected, so actual write-offs are minimal. Once a client goes through this process, it is rare that they are ever delinquent again, because they know this client will pursue the invoice.
Just like personal relationships, business relationships change over the years. Even if you and a client do wind up parting ways, you want to depart on good terms. Entrusting professionals to handle your collections may help preserve feelings and reputations on both sides.
Dean Kaplan is president of The Kaplan Group, a commercial collection agency specializing in large claims and international transactions. He is an expert in the technology industry and has 35 years of manufacturing, international business leadership and customer service experience. Today, he provides business planning, training and consultation to a variety of global companies.