Dealing with past-due deadbeats requires composure

July 18, 2000
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Most independent managers expect to make — and receive — prompt payment for purchases. But not all your customers pay for your services in accordance with your stated credit terms. That raises the need for procedures to follow for payment from past-due customers.

This discussion centers on the techniques that can orient your efforts to collect payments from past-due customers. No business can ignore customers who ignore a firm’s stated credit terms.

At one level, tardy payments by past-due customers hurt a firm’s cash flow. At the extreme, too many customers taking too long to pay can push a business into bankruptcy.

Prompt payment habits by your customers remain essential for business survival.

Above the law?

Another consideration necessarily circumscribes any collection effort. We confront a litigious business environment. Traditional business practices remain subject to legal challenges.

Excessive steps to collect past-due payments can lead to a lawsuit. The expense from defending a legal challenge can easily exceed the costs from accepting a bad debt write-off.

The legal limits on the acceptable collection effort may not appear reasonable to a business manager trying to collect a payment from a past-due account for a purchase extended on reasonable, acceptable credit terms. Nonetheless, those limits exist.

Don’t look for an escape into an assumption about business “equity” or expectations about a “fair” response to slow-paying customers. Some buyers can rationalize not paying for credit purchases on time.

Some can ignore financial obligations without concern. They also can ignore your best collection efforts.

Right to privacy

In any event, recognize that you cannot violate a customer’s confidentiality when pursuing a past-due payment. That precludes the use of notes or post cards that convey information casually to curious postal workers or an accidental passerby.

The confidentiality provision extends to letters you use to collect a past-due account. You can send a letter requesting payment, but nothing in the letter can imply any negative attribute about the addressee.

Don’t assume that working through an attorney evades the laws protecting debtors. An attorney cannot misrepresent his/her role in the collection effort.

Attorneys must reveal the nature of their interest in the matter. And they can’t make idle threats about the potential for legal action to collect a past-due payment.

Exercise a measure of caution in every aspect of the collection effort. Mail communication tagged with “personal and confidential” provides some protection. But don’t assume that provides protection for any overzealous effort to collect payment.

Don't delay, ask them to pay

At the same time, a logical premise encourages you not to delay your collection effort. Any delay in pursuing a past-due account reduces the potential for eventually receiving payment.

For example, most businesses collect more than 90% of customer payments that fall 30 days past due. However, the chances for eventual payment drops to 80% for accounts that fall more than 60 days past due, and falls to 70% when an account remains unpaid 90 days past the original due date.

The chance of collecting eventual payment when an account becomes more than six months past due falls to 50%.

A business eventually collects only one out of four that remain unpaid after a full year.

Get it in writing

From a positive perspective, some timely action early in the process increases the potential for collecting an account that falls past due.

First, make sure your customer understands your payment terms. A brief restatement of the terms may accompany the original invoice arising from a sale to a new customer.

To help ensure a clear understanding, you may have a new customer acknowledge his/her understanding by signing a letter agreement reviewing the transaction and the expected repayment terms.

A signed agreement doesn’t guarantee a customer’s prompt payment, but it can impart a measure of legality that some customers will find difficult to ignore.

Never delay following up on a past-due payment.

'We collect in peace'

Your initial contact with a past-due account should include some subtle detective work. Find out if the customer is upset about your product and services. Perhaps he hasn’t yet vented a complaint.

Approach the customer as if you or your business created the problem that made non-payment a conscious action by the customer. Accepting the responsibility for potential problems can provide the customer with a sound premise to make the payment.

That approach also can encourage future purchases by customers embarrassed by their late payment.

Most business managers respect a polite collection effort. So, show your customers you watch their payment habits, but can collect past-due accounts in a professional manner.

Indeed, most business managers remain honest, even in trying times. Ask for a dated commitment when the customer expects to make payment. Most will honor a personal promise for payment.

Remember, it’s easier to keep an existing customer than to attract a new one.

Unfortunately, a polite collection effort doesn’t always succeed.

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