Small-Business Guide to Collecting Accounts

Neither a lender nor a borrower be. Don't you forget: Stay out of Debt!-Skipper as Polonius - Gilligan's Island.

In the next few chapters, we will discuss how to collect money from the customers and clients who owe it to you. First, a bit of advice: Don't let your clients get into your pocket in the first place.

The first page of the book and you're already rolling your eyes. "I know, John. But that train has already left the station. Against my better judgment, I let my customer run up his account, and now I'm ready to collect. What do I do?" you're saying. If you're impatient, skip ahead in the book. Otherwise, please continue reading. It is information you've probably already been told, but it bears repeating.

• What Are You, a Bank?

A bank is in the business of lending money. Through a formal application process they assess a borrower to see if he is credit-worthy. They charge interest on their money. They send you a monthly statement. They know how much they can comfortably lose in bad debt. They have a collection department that does nothing but try to collect past-due and defaulted accounts. Do you do all that in your business? You do? Maybe you should run a bank instead.

If a customer comes to you asking if he can pay in installments, it may be a good idea to send him to a bank. Let the bank lend him the money. He can pay his installments back to the bank. The bank can worry about collecting in case of default. That way, you can concentrate on selling widgets and let the bank worry about collecting the account.

Of course your customer will complain that the bank won't lend him any money, but he promises you he will pay you every cent owed to you. Now think about this. The bank doesn't think he's worth the risk, so he's asking you to extend the credit. Why should you trust this person more than the bank does?

I know that in many businesses, it's necessary to perform some services on account. I know that some things would never get sold unless the salesman agrees to a payment plan. However, look really closely at how you do business. Is there any way to change your practices so that you can get your money up front? Be smart about to whom you extend credit. See if you can cut down the number of people you have to hit up for payment every month.

In order to keep the door open in your business, you have to charge a certain price for the goods or services you offer. Let's say you have a large number of people who are making payments to you, and a large number of defaulted accounts that you are attempting to collect. Your good customers, the ones who pay on time, are financing your bad customers. They make up the shortfall in your budget caused by uncollected accounts and the cost of servicing accounts and attempts at collecting bad accounts. The price paid by your good customers may be artificially high because you are putting too much faith in the bad customers.

The less you have to act like a Bank (or a collection agency), the more time you can spend selling widgets and developing your business.

• Get The Money Up Front

As much as possible, get the money up front. Get as much as you reasonably can before you open the customer's account. Look at the bad accounts you have now. On average, how much is owed to you? Do you see any trends? If a large number of your debtors owe you roughly the same amount of money by the time their account goes bad, you might think about raising their initial payment to cover this amount.

• How Far Into Your Pocket Will You Let Them Go?

Let's look at the following example:

A landlord leases a house to a tenant. The tenant gets behind in his lease payments. The landlord gives the tenant a couple of months to get his act together. Tenant tells the landlord that he's expecting a big personal injury settlement "any day now" and he will pay his debt, plus a little extra since the landlord has been so patient. Landlord waits a couple more months. Tenant says that the settlement is held up because of some red tape and legal mumbo jumbo, but his lawyer promises it will be paid "any day now". It's now been four months. In the meantime, the landlord has been paying the mortgage, insurance and property tax on the property. He also had to replace a water heater after a call from the irate tenant. The loss of rental income and the expense related to the property is now causing problems with the landlord's finances. He calls his lawyer, who tells him that the eviction process could take weeks or months before the tenant is forced out. It will take additional time and money to prepare the property to rent to another. In addition, it may be difficult to recover any of the past-due rent from the tenant.

In this example, the landlord had the best of intentions. He believed that the past-due rent installments were "money in the bank" since they were to be paid from an upcoming settlement. In reality, he cut off his income while his expenses continued on. In the above example, let's assume that the tenant really had a settlement coming to him. Who do you think will be paid first? The landlord, who has been patient enough to wait for four months for payment; or the electric company who's threatening to turn off the power, the bank who's threatening to repossess the car, or his court-ordered child support, the payment of which will keep him out of jail?

In situations such as this, there must be some point in time where a creditor has to cut his losses. If he lets his debtors string him along, he will end up working for nothing, and going to the poor house for his efforts.

In the example above, we saw the common debtor's excuse "I have a settlement coming to me any day now". This is one of several common excuses. If you deal with debtors, you will become accustomed to hearing them-and seeing them go unfulfilled:

• The check is in the mail;
• I'm waiting for my tax refund/ bonus/ big commission/ sale of my car/ etc. and I'll catch everything up.
• Somebody wrote me a rubber check and screwed up my bank account. Once I straighten everything out, I'll pay you.
• I get paid next week. Can I pay you then?

You should be in the habit of looking at these types of excuses with a jaundiced eye. In many of these cases, creditors have gone to great pains to draft a written contract or lease agreement that will protect them to the fullest extent, only to forego or postpone their legal rights in return for the flimsiest of promises. Do you notice that these excuses almost never work to the advantage of the creditor? It's a very rare occurrence that a debtor will say, "I just got my bonus at work. Let me pay several months in advance while I have the extra money".

• Conclusion

Try to avoid being a creditor in the first place. If you have to spend too much time collecting accounts, you take your attention, time and effort away from the occupation or profession you've chosen to practice. Let the debtor borrow from a bank to pay your account. If the bank won't lend him money, why should you be expected to? In many cases, it's necessary to invoice for services already performed or goods already sold. Remember to protect yourself with a written agreement and exercise your rights to payment promptly and prudently. Do not let your debtors too far into your pocket.