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Home Business Finance 8 Successful Debt Collection Techniques
Debt collection is arguably one of the least fun parts of running a small business. While most people would rather avoid it at all costs, it will actually cost you to avoid it. There are a few things you can do to make this process easier for yourself and your customers.
In this article, we’ll go over eight successful debt collection techniques you can employ to make the most out of your aging accounts receivable.
When you lose contact with a customer who has an unpaid invoice with you, you’re decreasing your chances of getting the invoice paid. Keeping consistent and strategic contact with your customer increases those chances. It’s not just about how often you contact them either.
It’s about the methods you use as well. Knowing what form of communication your customers respond to the best and what time they’re able to take your call is an important part of the debt collection process.
One of the best debt collection strategies is the omnichannel approach. This approach essentially uses all known methods to contact your customer at the right times. This includes:
All of these forms of contact are done incrementally to avoid overwhelming the customer. This works best when your customer is given the opportunity and resources to resolve the late payment on their own.
An example of this is sending a reminder email with a link to an online payment portal. The chance to resolve the payment issue through an online portal or a mobile app is extremely helpful in getting unpaid debt off your books.
The payment terms you lay out at the start of working with a new client sets the tone for successful debt collection efforts. When there’s a contract or agreement that specifies payment terms signed by both parties, there’s legal backing if you decide to file a claim with the courts.
If your client then has complaints or is confused about the terms of the agreement, you can quickly address those concerns so there’s no further issue. With unclear terms and no contract, it will be much more difficult to enact debt recovery practices with success.
As a best practice, you shouldn’t begin any work without a signed contract in place that provides specific details on:
Handling payments online is one of the easiest ways to stay on top of bills these days. With payment processing services like Paypal, Stripe, and Square there’s no shortage of ways to receive payments on the web.
When your payment process is inconvenient, it obstructs your ability to get paid on time. That impacts your cash flow. Streamline your bookkeeping and your payment process with accounting software.
You never know what someone’s going through that caused them to be in outstanding debt. There could’ve been a loss of income, or a life-changing event affecting their ability to keep up with regular payments. Usually, this looks like a drop-off from their normal payment activity.
Showing empathy when customers are going through a rough time helps maintain your relationship with them and allows you both to come to a solution on the overdue payments. This might result in offering them a payment plan to help them get caught up.
Other times you’re dealing with someone who is actively trying to avoid paying. It’s important not to make any assumptions about the customer’s situation. Try to be customer and solution-oriented. Have empathy towards the customer, but be direct about resolving the issue.
If they get abrasive during your conversation, you still have to keep a level head. Professionalism is part of your reputation. Unlike professional debt collectors, you’re likely not trained to handle verbally abusive or belligerent debt collection calls.
You can take some tips from them though:
When you’re pursuing payment on a delinquent account, it’s important to record each collection attempt. Include the date you contacted them, brief details about the call, and the results. To make it easy, you can divide your contact attempts into several crucial points.
Your friendly reminder should be a quick, light reminder that a payment is due. Because perhaps they just forgot with all the hustle and bustle of their lives. This could even be an email if that’s how you typically contact your clients.
If payment is still delayed after that reminder, there should be a past due payment notice sent. Include the amount they still owe and politely request payment at the earliest possible date.
Still no payment? Time to send a final notice. Your customer is no longer within the terms of payment you both agreed on. This contact attempt will be more firm than the previous ones, it should still include the amount of debt and a request for payment by a specified date.
If you’re not making headway after the first three collection efforts, then direct customer contact is your next move. A phone call or visiting your client in person may help resolve the issue. At the very least, you may be able to confirm their contact info and address as the same.
Next up is the letter of demand. This is not to be taken lightly. A letter of demand is sent by certified mail (to confirm that the customer received it) and you’ll keep a copy of the letter for yourself. This one is very direct and firm in its request for immediate payment.
What If your business has more than a handful of employees and has a debt collector team? Without a central system to house debt recovery information, your debt collection efforts might feel disorganized.
Centralizing your debt collection information allows others in your company to view the collection details for each consumer debt. With a collection team backed by a central database system, your debt collectors can:
Implementing a system like this can be costly and takes time for employees to get used to. But once it’s in place you can make a difference in the number of debtors and decrease the amount of bad debt your business takes on.
What if you could know that a customer was going to be delinquent before you started working with them? Instead of making collection attempts in vain, you could run a credit check before choosing to work with them.
When the nature of your business requires you to extend credit to your customers, you should check their credit references and see if there are any red flags on their credit. It doesn’t have to be a hard inquiry, but you should at least know if they have delinquencies with other businesses.
This can tip you off before you sign a contract and make your life a lot easier.
As a small business owner, you wear plenty of hats. But some things are better left to the professionals. Sometimes, a commercial debt collection agency is the best way to recover payment from a delinquent customer.
A reputable debt collection agency works on your company’s behalf to resolve delinquent debts. Most collection agencies are paid on a contingency basis. Meaning that they only get a percentage of the debts they collect.
Before choosing a debt collection agency to work with, it’s best to look them up through the Better Business Bureau (BBB) and find out if they’re licensed and bonded within your industry. Once they’re vetted you can start reaping the benefits of working with them:
With a commercial collection agency behind you, your debtors will be much less likely to continue not paying.
Overall, debt collection is a sensitive topic for most consumers who become debtors. As a creditor, it’s your responsibility to collect your debts to keep your business running.
Remember to keep empathy and solutions at the forefront of your debt collection process for clients who’ve run into hard times. The process of collecting debt isn’t easy, but with the right resources and consistent communication, it becomes more effective.
*The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.
Seychelle is a Maryland-based personal finance writer and business owner. She’s passionate about helping others out of financial pitfalls she’s already dug herself out of. Most of her finance knowledge stems from her career as a Financial Consultant and Branch Manager at the 7th largest US bank.
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