You work hard to generate sales and expect to be paid in a timely manner. But what if that doesn’t happen, and you end up with unpaid invoices?
If your invoices don’t get paid, your business’ cash flow falters, and stagnant cash flow is a direct path to business failure. This makes it a necessity to be proactive in pursuing payments from delinquent clients.
After all, outstanding accounts receivable (unpaid invoices) are not like fine wine: They don’t get better with age. If you’re in a service business and use the cash method of accounting, you can’t deduct the unpaid amount, and all your labor is wasted.
When creating your service agreement, set your company’s policy on what constitutes “lateness” (e.g. 30 days beyond the expected payment date).
Your decision about lateness may be influenced by how much you value the customer and their history of paying prior invoices; for example, a customer may pay late habitually, but if they always pay in full eventually; then you may not need to worry.
As soon as this late period has passed, follow up with a second (“past due”) invoice or a telephone call. A client that is experiencing cash flow problems may need some understanding on your part.
For example, the client may agree to pay monthly installments, enabling you to collect the full amount at some point while preserving the business relationship.
Some businesses may put a clause in their invoices to impose interest charges on late payments. While this is perfectly legal if done correctly, it can be very tough to enforce. Here are some of your options when it comes to tracking down clients with past-due invoices.
Remember—Collections Agencies Are Last Resorts
To the best extent possible, you want to give your customers the benefit of the doubt. Cash planning is of often an issue for many businesses—which is why companies of all sizes, in all industries, have trouble managing their finances. Empathize with your customer, and keep lines of communication open.
Never hesitate to follow up on an invoice with a past due invoice letter, and don’t feel like you are bothering them when you do. Prompt action and persistence may be uncomfortable, but it pays off when done correctly. And the alternative (i.e. not getting paid) is definitely worse.
Loop in Your Lawyer—Send a Demand Letter
Get your lawyer involved early. Before sending your customer to a collections agency, you will need to send a letter (or email) documenting that the payment is delinquent. You may also ask your lawyer to create a compromise through arbitration.
This option may alleviate the headache, heartache, and pain of navigating a dispute. And if collections don’t work? You may need to take your customer to court. Involving your lawyer early will lay the foundations for an eventual case.
When Is the Right Time To Send Your Customer To Collections?
The decision should never be one driven by emotion. Look at this decision through the lens of probability. There are certain behaviors in business that indicate a likelihood of payment default. If a customer seems like a default risk, it is in your best intrest to have a collections agency take over.
- When your customer has received enough advance notice. One potential protocol is to send customers to collections at 90-days past due unless the customer has a valid need to postpone or there has been a simple billing error.
By this time, the customer would have received automated payment reminders, a personal note, a phone call, and many options to resolve payment. Perhaps this customer will have also received an extension. In either case, there is always a “deadline,” and if that milestone does not happen, it may be time for a collections agency to take over.
- When your customer disappears. A customer’s disappearance is never a good sign. If your point of contact becomes unresponsive, reach out to additional team members within the organization— that’s why it’s important to establish a direct line to accounts payables teams.
If everyone stops responding, you have no reason but to assume that the company is experiencing a crisis or does not take its payments to vendors seriously. In this situation, you should ask a collections agency to take over.
- When your customer breaks promises. If you cannot trust a customer to have integrity in fulfilling his or her side of an agreement, you do not have time to waste.
You do not want to spend your time hounding down dishonest people for payments that your company is owed. A collections agency can be a wonderful resource.
How to Choose a Collections Partner
Ryan O’Hara, a sales director for Frontline Group, a company that owns multiple collections agencies, recommends that small business owners take the following steps:
- Know your needs. Do you need a collections agency that is licensed in multiple states? Is your business commercial or consumer related? Do you need an agency that works with a network of attorneys?
- Examine the history of the collections agency. If the company has been around for a decade or more, the organization is likely stable and reliable. You can also research the company through associations like the Better Business Bureau to check for accreditations.
- Be mindful that user reviews are likely to skew negative. The overwhelming majority of collections agencies have poor reviews. This pattern is due to the nature of the work.
- Check if your collections partner belongs to any professional associations. The Association of Credit and Collections Professionals (ACAInternational) and Receivables Management Association (RMA) are good places to start.
Even though collections agencies are bound to legal and compliance requirements, some will cut corners. Be sure to check references before signing any contracts.
You’ve Selected a Collections Agency— Now What?
You will sign a contract authorizing the collections agency to recover funds on your company’s behalf. The collections partner might charge a percent-surcharge or ask to be paid on contingency, based on the amount of your invoice.
The collections agency may also buy your invoice outright, which means they will pay you a portion of your invoice immediately. You can work with the agency to pass any and all fees to your customer.
The collections agency will take the invoice off your hands and follow up with your customer over phone and mail.
As your company’s agent, they will pursue repercussions of non-payment, including reporting your customer’s delinquency to credit bureaus and lenders.
Unfortunately, because of agency fees, turning to a collections agency means you’ll never recoup all of what you’re owed. Agencies typically charge a percentage of the recovery (i.e. 15%, 25% or more), but there’s usually no charge if they fail to recover your cash.
There’s no guarantee that the agency will recover 100% of the outstanding amount, as the agency may accept partial payment or payment over time. However, the old proverb, “A half a loaf is better than none,” is right, and you should recoup as much as possible through this action.
Here’s how the arrangement works: Say you’re owed $2,000, and the agency charges 25% of the recovery. If it recoups 60% ($1,200), you’ll net $900.
Check with the Better Business Bureau or your local Chamber of Commerce to find a reliable agency. It may also be wise to use an agency that is a member of the International Debt Collection Association, because, in order for the agency to be accepted into the association, it has to agree to follow an ethical and professional code of conduct.
The Bottom Line
Your goal should be to avoid the collections process, whenever possible.
Keep a line of communication open with your customer, and establish a strong rapport with accounts receivables teams. Your customers know paying an invoice is less expensive and less of a hassle than dealing with legal proceedings and collections efforts.
Make it as easy as possible for your customers to pay you online and with a credit card. Treat your customers as well-intentioned until they behave with negligence or violate your trust.
Whatever you do in pursuit of collections, be sure to not violate the federal Fair Debt Collection Practices Act.
Calling beyond business hours, using abusive language or making threats is illegal; on top of that, it can also lead to damaging criticism on social media. While it’s easy to get upset with delinquent clients, it’s vital to keep your cool and maintain your professionalism throughout the process.