Collections Strategies For a Bad Economy
The dismal economy is putting many small-business owners in an unpleasant position: having to aggressively pursue customers who aren’t paying their bills on time.
My colleague Simona Covel and I wrote recently that many businesses –- even ones that are otherwise doing fine — are finding slow-paying customers are hurting their bottom line. Some customers are paying weeks late, or not at all. Experts worry an expected surge in business bankruptcies could turn the situation far worse in months ahead.
Small businesses are notoriously shy about collecting money, for fear aggressive tactics will turn away potential business. But collections experts say small businesses need to get savvier about collections in this economy, or they face never seeing the money owed to them. Here are some strategies they suggest for improving bill collections:
- Write formal payment policy. Businesses should lay out their payment policies in advance, such as when payments are due and how late bills will be treated, so there are no miscommunications with customers. This might even include doing extensive credit checks on each new customer to gauge their creditworthiness. Some businesses are cutting off credit to their riskiest customers.
- Reward the early; penalize the late. Some businesses are giving customers discounts, such as 5% or 10% off, if they pay within a certain period of time. Others tack on a penalty if a bill is more than, say, 10 days past due. Businesses are more likely to pay on time if they know they’ll owe more money if they don’t.
- Collect upfront. Some businesses that previously accepted payment 30 or 60 days after delivery of product or service are charging customers an advance payment of anywhere from 25% to payment in full. This can also help weed out customers that aren’t good for the money and offers obvious protection.
- Call early. Research shows the longer a bill is overdue, the less likely it’ll ever get paid. Many collections experts say businesses should call a past-due customer within five days after a bill is past due. Calls are more effective than letters. Not to mention it will propel your bill to the top of the pile of bills due.
- Up the ante. Some experts recommend sending overdue notices in official envelopes such as the big red-white-and-blue priority mail envelopes. Some businesses also send out “pre-collections” notices that warn customers their invoice will be forwarded to a collections agency if they don’t pay within a particular time frame.
Have you had problems with late payers in recent months? Discover any effective collections strategies?