How to Collect Money Without Alienating Your Customers
Contractors discuss best practices for collecting on accounts receivable
Collecting money from customers can be a delicate situation, and there’s a fine line service companies have to walk so they don’t ruin the relationship with the customer.
There are forums all over the Internet offering advice on how businesses can collect money that is owed. A recent article from Inc. magazine suggests business owners should invoice sooner rather than later, monitor slow-paying accounts, state payment terms upfront, and follow up on a timely basis.
CASH IS KING
Paul Sammataro, owner, Samm’s Heating and Air Conditioning, Plano, Texas, just celebrated 10 years in business and operates mostly by cash on delivery (COD).
“If it’s a new customer, it’s always cash on delivery,” Sammataro said. “With our existing customers, we will allow them to mail a payment in, but we don’t wait more than 30 days — we don’t want them to extend over 30 days, basically.”
Sammataro said he hasn’t had to deal with many late payments, but there have been a few. In such cases, his company will mail and email a copy of the invoice as a reminder.
“Sometimes people do forget,” he explained. “We do electronic invoicing, so they’re getting an email when the job is done, not a paper invoice. And, it can get lost in that email oblivion that people get; I understand that.”
After 40 days, Samm’s Heating and Air Conditioning will send another email and letter, followed by a phone call. “Typically, a phone call will work for us,” Sammataro added.
Additionally, Sammataro has never had to use a debt collection agency, choosing instead to write off the amount owed.
“There have been a couple of cases where I ended up just writing it off,” he said. “I just figured, with the aggravation and trying to deal with somebody from the debt collector route, they just solicit you so hard, and I didn’t want to be in that mode. We don’t have that many accounts that have gone unpaid. For the few that may have warranted a debt collector, I felt it was best to deal with it in-house. And, it wasn’t a significant amount of money. Yes, it counts, but I felt it wasn’t worth the aggravation.”
To further rid himself of aggravation, Sammataro has even fired some of his customers, saying they weren’t worth the headache.
“Typically, those who run a little late will remain customers,” he said. “There have been a couple of people who have disappeared. Recently, I had one guy call in and tell us he was only going to pay half of the bill, and he would pay the rest in six months. We tried to explain that’s not the way we do business.
“This wasn’t our first interaction with this guy as we’d written off a bill of his for $163 two years ago. I ended up refunding his money and told him to call someone else next time he needed service. That’s how I operate. They say you can fire customers, and I have.”
The biggest tip Sammataro offers to fellow contractors is to collect payment at the time of service. “Stay cash on delivery until you have a relationship with the customer. And, stay on top of it daily, because 30 days can quickly become 60-90 days during the everyday operation of your company. When the money is flowing in, you may not be on top of accounts receivable or accounts that are overdue.”
Sammataro also strongly recommends companies avoid third-party billing — it’s what has allowed him to keep the unpaid balances down to a minimum, he said.
Isaac Heating and Air Conditioning Inc. in Rochester, New York, has different policies for the residential and commercial sides of its business, according to Adam Loehr, assistant vice president of finance. For residential service and installations, money is due at the time of service. For commercial service, money is due typically at the time of service, but there are a few customers who are billed quarterly. For Isaac, commercial installations typically require progress billing.
“As far as financing goes, we don’t extend loans or anything like that,” Loehr said. “For residential, we do cash, check, credit, and 30-60-90, where we’ll bill them over three months. And we offer financing through two different banks if they’d like to take out a loan.”
Isaac Heating and Air Conditioning actually has a designated collections person on its staff. “Sales representatives handle any outstanding residential customer balances for the first 12 weeks to 90 days,” Loehr explained. “Once the balance is outstanding for more than 90 days, it’s turned over to our internal collections person, who then contacts the customer a little more aggressively than the sales representatives would.”
There is no set date when commercial accounts are turned over to internal collections, Loehr noted. It happens when the sales representatives feel they cannot get the balance collected.
Loehr said there have been circumstances where the company has had to get an outside third-party collection agency or a lawyer involved, but not very many.
“Our guy has a lot of couth and tact,” Loehr said. “He doesn’t attack the customer. He reminds them we have a signed contract and asks them if everything went okay and if they have any questions, comments, or concerns. He explains that we want to maintain a future relationship, but, if they don’t pay, we basically freeze them out. We won’t perform any service for a customer if they have balances outside of 90 days. Typically, they pay, and it’s not an issue.
“Getting debt collectors and lawyers involved is really situational,” he continued. “Typically, it’s somewhere between 120 and 180 days, depending on how our internal collections guy perceives the situation. If he thinks the client’s going to progress toward payment, he’ll keep it a little longer; if he doesn’t, he’ll turn it over a little sooner.”
The key, according to Loehr, is to be diligent. “Set the guidelines up front with the customer so you know the customer knows they are required to pay right up front. You need a system in place so you can follow up with the customer on a consistent basis to make sure nothing falls through the cracks. It’s just about being diligent. And, don’t force legal action too soon, because it could damage the relationship with the customer in the long run.”
BUILD A RELATIONSHIP
Building a relationship with the customer is an important part of any service business, but, when it comes to getting customers to pay their bills, it’s crucial, said Greg McAfee, president, McAfee Heating & Air Conditioning, Kettering, Ohio.
McAfee Heating & Air Conditioning performs about 95 percent residential service. The company benefits from the use of digital invoicing and billing via the tablets carried by its technicians. This allows employees to run credit cards on site after every job. The company offers new-installation 90-day, six-month, and two-year same-as-cash financing options.
“We can go longer, as needed, but they’re not all same-as-cash promotions once you get into the longer term,” said Candice Salley, account manager, McAfee Heating & Air Conditioning.
Salley explained the company will send out a statement and then follow it up with a friendly phone call if payment is not received. “We’ll ask customers if they received the statement, if they need any copies of the invoices, if everything matches their records, and, lastly, when they expect to send a check. We try to secure a date and then follow up when we get close to that date. We try to always be friendly because overdue customers are still our customers.”
McAfee added that, if an account gets past the 60-day mark, depending on the customer, “We may have to put them on cash on delivery, or we won’t do any more work for them until they get a certain amount paid back to the 30-day mark.”
After 25 years in business, McAfee said he can count on one hand the number of customers who have not paid the amount owed. “We would either turn them over to collections, take them to small claims court, or just write it off. It just depends on what it’s worth.”
However, McAfee Heating & Air Conditioning tries to exhaust every possible solution in-house before taking the next step. “We make phone calls, send emails, and send certified letters,” Salley said. “They’re our customers, and we don’t want to get an outside company involved if we can collect it ourselves. A lot of times, if you can get them on the phone, and maybe they can’t pay the full balance that day, you may get half that day with the promise to pay the full balance in 30 days. We try to work with them the best we can before we call in a third party. We send them to collections only when we feel there’s nothing else we can do.”
McAfee’s been known to negotiate the price to settle outstanding debts.
“Something is better than nothing, but those are rare occasions. We aim to get paid upon completion whenever we can. This saves a lot of time and paperwork in having to deal with overdue accounts.”
It’s essential to remain friendly and understanding when working with customers, Salley noted. “The friendlier you are, the greater success you’re going to have collecting the amount owed, because they’re going to want to pay you. You need to build a professional relationship where they want to pay you before anyone else.
“If a customer is having problems paying you, they probably owe a lot of other people, as well. So, if you can be friendly and win them over, you’re more likely to get paid first, before the other list of people they owe.”
The company also makes it easy for customers to pay. They can drop off cash, mail a check, or give a credit card over the phone. McAfee will even send a technician or a driver to the customer to pick up a cash or check.
“A lot of people have different ways of collecting, but it’s all about maintaining a relationship with that customer who owes you,” McAfee said. “I want to continue to do business with that customer. There have been times when people are down on their luck and have lost their jobs. In those cases, we’ve either settled or worked with them, and they’re still customers today.”
Publication date: 7/13/2015