Red Flags, Slow Payments, and Collection Secrets
Abbreviated Versions of the Three Most Read YVCM Articles from 2023
Happy Holidays! During this season, many people take pause to review the ups and downs of the year gone by. Publishers are no different, but we like to focus on what piqued the interest of our readers…and then give them more of the same. In our case, we found our readers had an affinity for articles on identifying collection risks and the best ways of dealing with past due balances.
We are therefore providing you with an overview of three very popular articles along with links to the originals. Our gift to our free subscribers is that there will be no pay-wall — everybody gets the full summary. First we look at Red Flags that may indicate a customer could begin paying slower or default. We then provide situation intelligence regarding the causes of past due balances, and finally reveal seven habits common to successful collectors. Hopefully, these insights will help you with your collection efforts
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Learn to Recognize These Red Flags
There are two types of credit risk affiliated with selling on open credit terms. An increasing number of customers paying beyond terms (past due) will decelerate your cash flow, though you will eventually collect the funds owed. Far more damaging is a customer that defaults (never pays). An inability to replace the loss with new business will put a serious crimp in your cash flow, especially when the default involves a large amount.
If you have more than a few customers or you have been in business several years, chances are you have dealt with customers who pay late, have defaulted or are at risk of default. If you haven’t, you almost certainly will.
For the past year, the number of commercial bankruptcies has been trending upward and is at a 4-year high. Even more telling is that the number of business failures exceeds the number of new business formations — that has not been the case for over 10 years. This raises the question, what should I do?
Besides maintaining solid credit and collection management practices, credit losses are reduced when you are alert to warning signs, indicators if you will, that a company is at high risk of defaulting on their debts. Here’s 18 of these Red Flags that suggest a customer may be facing financial distress and at risk of defaulting on debts owed you:
Increasingly slower payments
An increasingly erratic payment pattern
A significant increase in requests for invoices or other documentation copies
A significant increase in short payments and/or deductions
An increasing pattern of disputed invoices
An unwillingness to pay undisputed items on an invoice
Broken promises to pay
More than one bounced check (whatever the reason) and other payment defaults
No response to your efforts to make contact — doesn’t answer the phone, doesn’t return messages, bounced emails, etc.
Requests for extended payment terms
Request for an increased credit limit
Notices of derogatory events (e.g. judgements, liens, and suits)
Deterioration in risk rating/score
Deterioration in payments to other suppliers
Missed bond payments,
Breached Loan covenants
Deterioration in revenue, profit, cash generation, employee layoffs
Seriously negative business press
While your normal Credit and Collection practices help you maintain control over most of your customers, there are always a few accounts that may surprise you. That’s where the Red Flags come in: to help you identify the customers who previously did not appear to have an elevated risk of chronic slow payments, financial distress, and potentially default. Finally, when you see a Red Flag you should:
Be decisive and act quickly
Do whatever you can to restrict your AR exposure to the customer
Closely Monitor Red Flag accounts
Speak with the principals of the company
Employ Risk Mitigation Tools
To learn more about identifying Red Flags and how to respond to them, check out the original article here.
Please feel free to share this newsletter with your small business customers . . . it just might help them pay you sooner!
Understanding the Causes of Slow Payments
There are any number of reasons a business may pay beyond your terms of sale. Some of the reasons for paying slow are more serious than others, but they all impact your cash flow and your collection efforts.
One important key to effective collections is knowing how to respond to each situation. On the one hand, you need to be ready to respond to the excuses you will hear: the check is in the mail, our bookkeeper is out sick, we’re a little short this week, and so on and so forth. On the other hand, you also need to recognize the underlying issue causing your customers’ late payments. Once you understand why your customer is paying late, you need to not only collect what is owed, but also seek a remedy to prevent future past due payments.
Readers of Your Virtual Credit Manager can now access sharply discounted business credit reports from D&B, Experian, or Equifax through our partner accredit.
Ten Reasons Customer Pay Late
Cash flow problems: Once you recognize a customer has cash flow problems, you will need to determined if this is a temporary situation or a sign of financial distress. You may still be able to safely and profitably sell to them by restricting their credit and holding orders for payment. When possible you should also look at implementing credit enhancements such as a guaranty, securing collateral or credit insurance.
Changing Conditions: A volatile interest rate and inflation environment is one example of changing conditions. Product, industry, and competitive trends can all affect an enterprise’s profitability, and in turn its ability to pay. A deteriorating situation calls for more conservative credit parameters and aggressive collections.
Invoice and Invoicing issues: Delays in the sending of invoices and resolving billing errors will hold up payments. You may also be sending your invoices to the wrong place or in the wrong format. When recurring errors show up, they need to be communicated to your billing department. Here’s a list of 27 Items to Include on Your Invoices in order to get paid sooner.
Disagreements on the quality of goods or services received: If the goods received are damaged or not as described, the customer may delay payment until an accommodation is reached. Immediately request payment of all undisputed amounts while the issue is being resolved. If other customers are having the same issues, you have an internal problem to resolve. If quality issues are only occurring with this customer, you need to make sure your firm is able to meet the customers requirements.
Credit terms abuse: Larger businesses often take advantage of the credit terms offered by smaller suppliers, choosing to pay invoices beyond the due date to improve cash flow. There are two things you should do in response. First, your collection efforts should always begin within a few days (a 3-5 day grace period is typical) of the customer’s invoice due date. Secondly, include a clause in your customer credit agreement allowing late charges. Late fees, admittedly hard to enforce, are a useful negotiating tool when pricing is being reviewed or if an account has to be placed for third-party collections.
The customer’s payment approval processes: The smaller the business, the less likely they will issue payments more than once per week. Knowing their payment schedule will give you some idea of when you can expect payment and coordinate your collection efforts accordingly.
Negotiating leverage: Businesses may use late payments as a negotiation tactic, hoping to receive discounts or more favorable terms on future purchases. If the customer has market power, you are best served by acceding to their terms as long as you can maintain a reasonable profit margin and by asking for a longer term on the contract to take away the opportunity for them to periodically chip away at your margins.
Technical issues: Computer system failures or internet disruptions, can cause delays in processing invoices and making payments. Natural disasters such as hurricanes, floods, and earthquakes can cause system failures, as can cyber-attacks, which are becoming more frequent. There is not much you can do when your customer is dealing with technical issues and can’t generate a payment, other than to stay in close touch and wait it out.
Poor Management: Chronic technical issues, however, may be a sign of poor management. Record-keeping issues are related to poor management as well, and can exasperate many of the reasons listed above. If a customer is constantly loosing your invoices, you should send them duplicates as part of your follow-up process. Providing proofs of delivery with your invoices is another way to work around a customer with record keeping issues. The bigger problem with a business that is managed poorly, is that the business is likely to deteriorate over time.
Lack of Character: Unfortunately, there are business owners and executives who lack integrity. They will only pay you if it is convenient for them to do so, which is often to get you to process a new order. These folks raise frivolous disputes and are otherwise bad actors. Beware of firms that have a significant history of being the subject of lawsuits or have a history of bad checks and bankruptcies. Lack of character also shows up in poor payment histories, even though the trade credit references they provide on their application may report them as paying promptly.
There is always a reason for a customer’s late payment. Listening carefully to your customers response to your request for payment will provide clues about the underlying reason, if not tell you outright what the problem is. Figure out what makes your customer tick, and the course of your collection and remediation efforts will become clear.
For more on the subject of late payment reasons and remedies go here.
The experts at Your Virtual Credit Manager are ready to help you improve cash flow and reduce AR risks during these challenging times. What do you need help doing? We are currently offering 33% off our standard small business consulting rates.
Seven Secrets Used by Effective Collectors
After observing top notch collectors doing their job you might come to the conclusion that personality is critical, or that strong negotiating skills are essential. Those, however, are secondary attributes. The gift of gab and strong negotiating skills certainly help, but you can still be more than competent collecting from business customers when those are not your strengths.
Successful collectors understand that persistence is critical to getting paid. However, persistence alone won’t get the job done. There are other factors that contribute to high performance. Here then are seven secrets of highly effective collections:
Collections Is a Numbers Game: You must reach a critical mass of daily (weekly, if you have a smaller customer base) contacts or you will not be successful. It’s all about maintaining full coverage of all past due items. Effective collectors call early and often. If you don’t keep up, you are giving your customers leeway to go further past due.
Expect to Be Paid: Successful collectors operate on the assumption that the customer is going to pay. Never ask customers if they can send a payment — ask them to mail their check or send the funds electronically today. If the customer says they can’t, ask them how much they are short. Successful collectors do not ease up on the pressure. Even financially distressed companies have some cash flow, so you need to work at getting each customer to put what they owe you at the top of their list of bills to be paid.
Be “On” All the Time: Even when resolving disputes or answering customer inquiries, you need to be ready to collect. Tone of voice and attitude are key to projecting a firm, no-nonsense persona. There is no place for lethargy. Successful collectors are energetic and always ready to deflect customer excuses. If you are off your collection game, you will set a pattern of behavior that will be harder to overcome in the future.
Knowledge Supersedes Personality: The best collectors are always personable and professional; however, they rely more on information than charm. Payables clerks, purchasing agents, bookkeepers, accounting managers and controllers all respond best to somebody who has the facts at their fingertips. Moreover, these people don’t owe the money, it’s their company that does. If you have to go back and look something up for the customer, you have already lost the first round by wasting some of their time. They are professionals, too, so treat them as such by being prepared and having command of the details.
Emails Are a Powerful Collection Tool: There may not be enough time to call all your past due customers over the course of a week, but there is enough time to call the most critical accounts and email everybody else. You also need to be following up on any accounts that don’t respond to your initial outreach, or who have not paid as promised. Using email templates that can be rapidly generated allows you to maintain full coverage while facilitating a focus on the largest past due balances and other key accounts. For more about an effective dunning process check out this post.
Payable Clerks Are People: Just as salespeople strive to build relationships with their accounts, collectors need to build rapport with their customer’s purchase-to-pay staff. It goes beyond being professional and polite. Busy people respond to friends better than strangers. By getting to know your counterparts, and the working conditions and business systems that define their environment, you will be better able to get on-time payments.
There Are No New Excuses: Even if a customer has a valid reason for delaying payment, it’s still an excuse. The best collectors have not only heard every excuse, but also have ready answers to overcome these objections. Keep a list handy of excuses along with the responses you have found effective. For more on overcoming excuses, go here.
These seven secrets, or habits if you will, are all part of a means to an end. Successful collectors incorporate these habits into their efforts for the purpose of collecting past due balances, but that is just the initial objective.
The ultimate goal is to train your customers to pay on time in accordance with your terms of sale. If you tolerate slow payments, your customers will continue to pay late. By not tolerating late payment behaviors, you are putting pressure on your customers to change their payment habits. Every customer that you can convert to on-time payments is one less future collection issue.
For more details about what successful collectors have in common, go here.