Debt Collection

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Debt collection is a deliberate attempt by a business to collect an obligation that has become past due. In normal transactions between two businesses, an invoice is rendered and payment is due within 30 days—unless, by special arrangement, a more generous schedule of payments has been agreed upon. Retail customers usually pay cash at time of purchase or, common in medical practices, are billed for portions not covered by insurance; payment is due some reasonable time after billing, e.g., five days or a week. After these time periods have passed, the payment is past due. In normal accounting practice, overdue payables are classified as 30-, 60-, and 90-day past due, and the accounting department routinely sends out "past-due" notices. Once an account is more than 90 days overdue, it becomes problematical and requires special action. In effect the buyer is now using the seller's money without compensation.

Debt collection, in another sense, may be the main business of a small enterprise; it may have been formed to collect money owed to others for a percentage of the debt owed. The small business, in yet another sense, may be the subject of debt collection activity, either because the business has been careless in paying bills or because the owner refuses to pay for a cause: perhaps the product shipped was deficient, etc.

INHERENT CONFLICTS OF INTEREST

A business expends considerable resources contacting, courting, pleasing, and servicing its clientele. Under normal circumstances, the overwhelming majority of customers pay reasonably promptly so that the payment pattern will have the shape of a bell curve: a few prepay or pay early, the majority pay on time, a few persistently pay late. The very few who fall beyond this pattern may do so because of unusual circumstances. Real "deadbeats" are difficult initially to identify. For this reason most businesses, small or large, treat persistent late-payers with much more courtesy than they deserve. Collecting receivables and paying payables are inherently in conflict. In many business-to-business situations, the customer may have a policy of paying late in order to show a better return on assets to its parent: it will be energetic in collecting, a laggard in paying. Debt collection, for this reason, is a difficult area of management for any business. The business, after all, also benefits from early collections and late payments. But if it is too aggressive collecting outstanding obligations, it may damage its standing with a valued customer.

ELEMENT OF A GOOD COLLECTION SYSTEM

Whatever its size, a business should pursue collections using a consciously formulated policy with well-defined triggering milestones for actions and an intelligent review process to protect the company's overall posture. Even in a business where the owner is simultaneously chief administrator, salesperson, and accountant, the collection policy should be capable of being written down under a few bullets. Long before collection begins, the company, of course, should have done its homework and established the customer's credit-worthiness. Effective collection systems 1) emphasize and highlight payment conditions in proposals and contracts, 2) kick in promptly, 3) have built-in flexibility and management review, 4) follow a systematic sequence of escalation, 5) are characterized by consistency and persistence, 6) match debtor's behavior to seller's behavior rationally, and 7) work toward definite closure within a preset timeframe.

Emphasis on Payment

Where at all possible, the business should strive to highlight payment term in its proposals and contracts in such a manner that the buyer is aware of the seller's policies—and its emphasis on being paid promptly. Michelle Dunn, an expert and popular writer on the subject, for instance, advocates that businesses should strive for written payment agreements. Even if a business cannot prevail in getting a particular contract clause, trying to do so may be remembered and may be helpful later.

Timing

Experts in the field agree that acting promptly on overdue obligations is of primary importance. Michael Giusti, writing for New Orleans CityBusiness, gave this issue a memorable formulation: "Debt collectors tell clients [that] overdue bills are not like fine wine—they only worsen with age." Citing Dave Duggins of the Duggins Law Firm in New Orleans, Giusti points out that "after an overdue account becomes 1 year old, the chances of collecting have all but evaporated." In a well-designed system, every overdue account will receive attention on a predefined trigger date; the action taken, however, may be governmened by additional considerations.

Flexible Review

A sensible collection policy will recognize up front that knowledge of the customer is all-important both in selling and collecting. Therefore collection activity should be organized to pool information about a late- or non-paying client to discover early what the situation "over there" may be like. Action, including the initial action, should have inputs from all those involved with the debtor. This process may uncover problems which, once fixed, will cause prompt payment and thus avoid unnecessary spinning of wheels.

Reviewing the problem in some detail and then, if indicated, working with the delinquent client may provide the business unexpected opportunities. The client may be going through a temporary problem in which the company can help, perhaps merely through patience. The contact involved in working with the client may create new bonds that, later, will benefit the company. Such effort may also yield partial payments as the customer shows his or her good faith. Flexibility is thus very useful, all things equal. If the situation is hopeless, time can be saved. A rigid policy is never indicated unless the debt is too small to merit the effort required to turn corporate cartwheels in its resolution.

Systematic Sequence

As already indicated, most debtors will have received past-due billings before collection activity even begins, and even such billings, highlighting the amount of time a bill is overdue, have a built-in feature of escalation. Similarly, collection effort should proceed in stages that give the debtor a certain benefit of the doubt initially. These stages may involve letters, then calls, and finally visits or—given other circumstances—precisely the reverse of this sequence. Which style of escalation is best will be well-known to the company.