Businesses that operate in the retail or restaurant spheres have it relatively easy when it comes to debt collection. They generally take payments right at a point-of-sale terminal and customers go on their merry ways. (These enterprises face many other challenges, of course.)
For other types of companies, it’s not so easy. Debt collection can be particularly challenging for business-to-business (B2B) operations, which often find themselves in complex relationships with key customers that aren’t quite as simple as “pay up or hit the road.”
If your company is dealing with slow-paying customers, which is hardly uncommon in today’s inflationary environment where everyone is trying to preserve cash flow, sometimes it helps to review the basics. Here are six tried-and-true strategies for increasing your chances of getting paid one way or another:
For new customers or those with a documented history of collections issues, you could start asking for a deposit on each order. This would generally be a small but noticeable percentage of the contract or order price. You could also explore the concept of asking for a service retainer fee. Although these are typically associated with law firms, other types of businesses may use them to cover all or part of the expected costs of services.
Most customers are likely familiar with the concept of late-payment fees from dealing with their credit card companies. Applying this same concept to your collections can pay off. Implement fees or finance charges for past due amounts. Place extremely delinquent accounts on credit hold or adjust their payment terms to cash on delivery.
An effective collections strategy isn’t only about “penalizing” slow-paying customers. It’s also about incentivizing those who pay on time or who represent a potentially lucrative long-term relationship. Crunch the numbers to determine the feasibility of giving discounts to customers with strong payment histories or to those who have improved the timeliness of payments over a given period.
Set up regular e-mail reminders and place live phone calls to customers who haven’t settled their accounts. If the employee who works directly with the customer can’t resolve payment issues, elevate the matter to a manager or even you, the business owner. In B2B relationships, it’s often helpful for the manager or business owner to contact someone higher up in the customer’s organization. If necessary, consider executing a promissory note to prevent the customer from disputing the charges in the future.
If, after repeated tries, your collections efforts appear unlikely to bear fruit, you should start looking into getting help from someone outside your company. This typically means engaging either an attorney who specializes in debt collections or a collections agency. View this as a last resort, however, because third-party fees may consume much of the collected amount and you’re unlikely to continue doing business with the customer.
One last important point about debt collections: If an outstanding debt is uncollectible, you may be able to write it off as an ordinary business expense. Be sure to document each customer’s promises to pay, your collection efforts and why you believe the debt is worthless. Consult with us about claiming such tax deductions. Our Chicago tax accounting services team can also offer assistance in improving your overall accounts receivable processes.