Commercial Debt Collection Strategy – 5 Step Process

Commercial Debt Collection Strategy - 5 Step ProcessAs the faltering economy continues to limit access to bank credit, demand for trade credit is exploding. Companies are tightening the screws on their vendors as the credit crunch intensifies their efforts to hold on to their cash. Commercial debt collection has become a top priority. Read more about Commercial Debt Collection Strategy using a simple 5 step process.

What can you do to stay out of the vendor-lending business and minimize credit risk?

The good news is there are solutions for creditors to this growing problem that have been around for years. But they have only been used by a few savvy credit managers and business collectors.

Our free monthly “Credit Tips & Trends” will deliver important information to help you collect more money, sooner, at less cost, and without losing valued customers.

Slow Payments Threaten Your Corporate Health

Generating revenue is a great thing. It certainly shows your company is on track, but it is just a number in a spreadsheet until cash is deposited into the checking account. Unless, and until, revenues are converted into cash, your cash flow will suffer.

As the expression goes in our industry: Profit is an opinion – Cash is a fact! The sale is a key event, but it’s not “high-five time” until the money is collected.

As customers stretch payables out to 60, 90 even 120 days or more, credit managers are getting more and more excuses, tactics, and ploys from customers to postpone payment. The older an account becomes, the better its chance of becoming a worthless write-off.

More than ever, your business needs a proven and profitable plan to manage the growth in receivables and their collection.

Time is Money

A collection plan won’t work unless every member of your team understands the following truism: collecting accounts receivable is a race against time. That is, receivables are like freshly harvested vegetables; as they age, they lose value.

A lot of value!

Generally speaking, the probability of collecting the full value of an account decreases by 12% each month. And once an account becomes 60 days old, debtors will not pay voluntarily and creditors must make a significant effort to convert the account into cash. In fact, accounts payable personnel are routinely trained to pay creditors based on their own measures of priority. As a result, your collection efforts must be to become a priority to your customers – and fast.

The 5 Step Process that Keeps the Cash Coming In

1. Credit Policy: If you don’t have one – your customer will write it for you.

The first step in a profitable collection process is developing a credit policy that encourages profitable customers and helps avoids problem buyers. Develop a written policy and a written application. Consult a professional when it comes to your policy and applications. Ask for and verify references. Once credit is extended, monitor the customer and don’t hesitate to implement an annual qualification for each account.

2. Make sure everyone’s on board.

Hopefully everyone in your organization agrees that putting more money into the company’s checking account is the purpose of all sales activity. This second step is often the most overlooked. As a policy only works when it is followed, make sure to communicate and follow your policy. Look for ways to bridge the gap between sales and credit.

3. Prompt billing.

Send an invoice as soon as possible. Use your invoice as a cash flow tool. The “Remit To” address should tell them exactly where to mail payments. The “Terms of Sale” should calculate the specific due date and print out on the invoice, rather than your terms (i.e.-Net 30) which is subject to various interpretations. If you offer payment discounts, it’s better to spell everything out in plain English. Instead of: “2% discount if paid within 30 days”, be specific with “If paid by May 1st, deduct $1,265.00”. And in regards to questions and disputes, put a name and phone number to contact on the invoice. This helps take away a major stall tactic.

4. Use the most effective collection letters and phone scripts.

Our email series includes collection letter templates (with tutorial) for the following three mainstream and two situational letters:

Mainstream: First Collection Letter, Final Demand Letter, The IRS Advantage Letter.

Situational: Bad Check Letter, Debtors Exam Letter.

These letters are time-tested and have been proven to outperform standard letters.

The tip on making collection calls includes sample phone scripts you can use to gain a higher payment priority position than your customer’s other creditors. This is the essence of all collection calls – you’re competing for the next available A/P dollar.

5. Know when to hold ‘em and when to fold ‘em.

You want to maximize your internal collection efforts. But at a certain point your odds of bad debt losses actually increase by granting a customer more time. The trick is to add more steps to your collection process, not to wait longer.

Each of these steps has been road-mapped and explained in a series of monthly emails authored by Stevens & Ricci, Inc. Called “Credit Tips & Trends,” each email is loaded with tools, tips and techniques on how to create and implement an effective commercial debt collection program.

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