C&W’s Greg Cohen shares insight in Q3 Credit Research Foundation News

How to Improve Your Odds of Collecting Late Payments Without Severing the Customer Relationship

cohen_gregBy Greg Cohen
President & CEO, Caine & Weiner,
President, International Association of Commercial Collectors

Editor’s Note: This is the first of a two-part series. The next article for the 4Q CRF News will address the topic of how to best prepare accounts that will be sent to collection agencies.

Even the best customers will sometimes pay late. But with skillful preparation, communication and documentation, you can decrease late payments, improve your odds of collecting on overdue accounts, and preserve or even improve your relationship with most customers. Here’s how:

call-center-for-liBefore the sale

Employees, colleagues and customers are more likely to successfully meet expectations when they know and understand them. Your company needs a solid, updated credit policy and equally well-crafted credit and sales documents, including a thorough credit application.

Your credit policy should establish payment expectations – including basics such as what documents must be completed by the customer before credit is issued, at what point in the transaction payment is due, and at what points the credit analyst should make payment reminder calls and turn an account over to a third party.

Requiring every customer to fill in all fields on your credit application is a must, said Tony Terry, President of Continental Recovery & Filing Solutions. This information can prove vitally important if there is a payment problem in the future, he said, and the prerequisite itself is a screening tool. “Typically the accounts where somebody didn’t complete the applications are the ones that go south on you,” Terry said. “There are companies that we like to refer to as ‘professional debtors.’ Especially in industries such as food and beverage, where there are a lot of vendors and competition is stiff, principals who are put on a COD basis with one vendor will sometimes apply for credit with another.” Leaving off important information helps them do this.

Credit analysts will benefit, and credit department efficiency will increase, if your credit policy includes a matrix of common situations that analysts in your industry face when seeking late payments, and a range of solutions they can offer without additional authorization, said Lee VandenHeuvel, President of Ross, Stuart & Dawson.

Such a matrix might allow a new customer of less than 12 months with some on-time payments and an overdue balance of less than $10,000 to go on a 6- or 12-month payment plan, provided they agree to pay a certain percentage of the debt each month, for example.

Your company credit policy should be required reading for all sales and credit employees. But what about customers?

“Don’t assume customers know your policy. You have to communicate it clearly to them,” said Joe Batie, Chief Commercial Officer at Caine & Weiner. Consider creating a customer document that outlines your standard payment and credit policies, including time limits for reporting problems with goods or services. Confirm receipt, and make sure customers have easy access to those policies in the future.

After the sale: Be friendly. Listen closely. Observe.

When a shipment or service should have been received, the customer’s credit or sales representative should call to ensure that it did, and that the customer’s expectations were met.

This call helps strengthen the mutually beneficial relationship between company and customer, and emphasizes the caller’s role as an in-house advocate. If all is well, note that on the account. If there is a problem, note that and resolve it, or see that someone does, and check back in. Most customers will pay you on time. For those that don’t, your notation that expectations were met and when will prove useful.

Especially with new customers, make a reminder call (or utilize other means of customer communication used in your particular enterprise) several days prior to when payment is due, if it has not yet been received.

“When you get the first invoice paid from a new customer, make a copy of the check they paid you with and throw it in their file,” Terry advises. “Sometimes the banking information they put on a credit application is not from the same account they are paying you with.”

With established customers, watch for pattern changes, all of which merit at least a phone call:

  • Payment comes in later than usual.
  • Payment comes in a different form than usual; a check or automatic transfer customer suddenly uses a credit card.
  • Change in quantity. If a customer who is paying on-time bumps up the quantity of their order, hurray! They are doing well, and so are you. If a customer who is falling even a little behind their usual payment cycle does this, it can signal stockpiling because of a cash-flow problem. If a customer decreases their usual order, they may be planning to switch providers.

“You need to immediately contact the customer to find out what the reason is for the changing in their pattern,” said Thomas E. Brenan, President and CEO of Altus Global Trade Solutions. “Verify what they are telling you and act accordingly.”

Late payment. Now what?

Before contacting your customer, research both the company and the industry. A failing company in a vibrant industry is a much different situation from a credit standpoint than a long-successful company with a good payment history whose industry is in a spiral.

Gather the internal documents and account notes as well, and have them in front of you. Is there a personal guarantee of payment? If so, this is a very powerful tool of persuasion, and you should remind the customer that you have one. Understanding the customer’s circumstances and knowing the account history shows empathy while also giving you authority.

Next step: pick up the phone. How soon depends on industry – you want to act much more quickly when dealing with perishables, such as produce, for example. But know that the older a debt becomes, the less likely you will be to collect it.

Written communication has its place, and you should send letters or email to back up agreements or when phone calls go unanswered. But phone calls are more personal and efficient, allow two-way communication, and enable you to both use and perceive tone.

Remember that the majority of late-paying customers want to be current and preserve your professional relationship as much as you do. “You have to convey the message that you’re here to help, not to make life difficult. If you do the latter, you’ve lost the battle already,” VandenHeuvel said. “This really can be done in one sentence, ‘Our company has had a great relationship with your company, and my job is to make sure this relationship continues to thrive. What can I do to help?”

Customers who pay late either can’t pay or won’t pay. The credit analyst’s goal is to determine which and proceed accordingly.

Customers who can’t pay

When customers say they can’t pay, ask why. Your research may have already unearthed the reason: a downturn in the industry; a loss of a major customer; a change in business ownership, even within a family; a fire or natural disaster.

As a Louisiana-based businessman, Brenan has witnessed not only businesses themselves, but business lifelines such as delivery and the U.S. Postal Service, stymied by Hurricane Katrina and, more recently, major flooding.

When negotiating with a customer who can’t pay, be respectful and professional. Especially with a long- established customer, you may feel for them, and it’s ok – in fact good – to express that.

Remember that kindness can literally pay off. A company in financial stress likely owes multiple vendors/suppliers money. Being kind and courteous makes it much more likely that your company will be the one to get the check.

Ask when they can make payment in full. If they cannot make payment in full within a reasonable time – and the analyst decides what’s reasonable – suggest a payment plan. Consult the payment plan rules or matrix in the credit policy. Also trust your research and judgment.

If this is a reliable customer in an industry that has slowed, but is expected to pick up – oil and gas for example – and they ask for more time than you are authorized to give, offer to advocate for that with your manager. Or if you are the manager, consider it. They will likely be a strong company again, and you have earned loyalty points. Conversely, if your research tells you this company is not likely to recover and/or if the customer balks at a payment plan, suggest a settlement, again consulting company guidelines and seeking approval to go beyond those guidelines if appropriate.

Customers who won’t pay

Let’s acknowledge that customers who could pay, but won’t pay, are the most frustrating. But don’t express that to your overdue customer. They are not in collections, you can still fix this, and you might learn how to improve your own company along the way.

Most often, the customer will tell you there is a problem with their order. It may be real, perceived or made up. You have to determine which. This is where documentation of the call after goods or services were delivered comes in. Do you have confirmation that they were satisfied? Educating customers on your credit policy has a role here too: Remind them that if there ever is a problem, they must let you know within a certain window, or else they are responsible for the cost.

As you listen to then investigate what the customer tells you, you may actually learn that your company is responsible, or partly responsible. The goods or services may not have been delivered as promised, for example. Or someone within your company may have made an unauthorized payment deal with this customer, or just given bad information about when payment was due.

If you find any missteps within your company, your company must own them, and then fix them. Communicate what happened to the right people. Make sure everyone understands policy and where the system broke down, and fix it. Apologize to your customer and make it right with a new delivery, a credit or partial credit, as is warranted.

If an analysist discovers that your company did everything right, but this is an otherwise fantastic customer and the disputed amount is small, it may be worthwhile to, with authorization, absorb some or all of the loss. If this does not apply:

  • Present your research to the customer. Be firm and specific – this is powerful. Ask again for payment in full.
  • If the customer still says they won’t pay, tell them it’s nothing personal, but they have a choice to make: pay in full now; agree to a payment plan or a settlement; deal with a collection agency and potentially court.

Follow Up

The two most important aspects of negotiating with someone who owes you money is to do what you say, and hold them to what they say with follow-up contact.

  • If no agreement was reached, and you said collections was the only alternative, send the account to collections.
  • If a payment plan or settlement was agreed to, follow up as soon as possible with an emailed or written copy of the terms.
  • In the days before the payment is due, if it has not arrived, call with a reminder. This lets people know you are serious and paying attention.

If payment does not arrive on time, call, ask questions and listen to the reasons why. Some new information may inspire you to seek another exception for your customer. But a broken promise is never a good sign. And in most cases, this account should go to a collection agency.

If the payment arrives on time, send an email confirming receipt and say thank you. You should still consider tightening terms, by requiring a cash-on-delivery or even pay-in- advance arrangement. Let your customer know that after the debt is payed, you will see that their company credit is fully restored.

Negotiating Tips

  • Ask for the balance in full.
  • Assume the customer has the money to pay.
  • Ask why and get proof.
  • Ask for more/offer less than you are willing to accept.
  • Never accept the first offer. Always counter-offer at a higher amount to get them into a discussion.
  • When giving concessions, get something in return.
  • Payment plans must be reasonable as defined by your company, not the customer. If a balance is $50,000, a $250-per-month plan doesn’t fly, but $2,000 per month might
  • Don’t be afraid to say no
  • Payment plans should be done in writing. Follow-up prior to the due date to ensure adherence.
  • Try to get pre -authorized payments via ACH or credit card to avoid hassles and playing phone tag every month.

Source: Caine & Weiner; Ross, Stuart & Dawson

Twentytwo Items Every Credit Policy Should Include

Remember, every credit department is unique. Your company’s place in your market, your brand strength, your risk tolerance, your profit margin, your volume of orders, and many other factors, all impact what should be in your credit policy. So this list should be considered a checklist to get started. Here’s what to include:

  • Your credit department’s short- and intermediate-term goals.
  • Each person’s credit granting authority.
  • How to respond to credit inquiries.
  • How and when to request updated trade references or financial statements from customers.
  • How work is to be prioritized.
  • A specific collection strategy. One simple example might be to say that telephone calls are more effective than email in collecting past due balances because they are more direct and harder to ignore. Therefore, analysts should call rather than write whenever possible.
  • Customer payments may never be “creatively applied” or deliberately misapplied.
  • On-line credit notes should be comprehensive and comprehensible. In the long-term, more detailed credit notes save time.
  • Credit analysts are expected to be tenacious, but always professional and business like.
  • Sales and credit are teammates, not competitors.
  • Attention to detail is absolutely essential.
  • Broken payment commitments are a red flag and should be followed up on promptly.
  • That it is nearly always worth the time taken to confirm a payment commitment in writing.
  • The ability to reconcile disputed balances is an essential job skill for anyone wanting to pursue a career on the A/R side of credit.
  • Getting unearned discounts repaid is never easy, and requires tact and persistence.
  • Customers and salespeople expect the credit department to notify them of credit-holds immediately and preferably before the hold actually goes into effect.
  • Emotional outbursts have no place in a professional credit department.
  • Credit professionals cannot allow themselves to be drawn into arguments with salespeople or customers.
  • Credit specialists are expected to be and act like negotiators and not note-takers.
  • Credit specialists should try to maintain good working relationships with their counterparts in the customer’s accounts payable department because in many cases the A/P department has a major role in determining what gets paid and when.
  • Broken commitments and bounced checks are dramatic indications that the customer is in severe financial trouble.

Click here to read the entire Q3 Edition of Credit Research Foundation News.