Borrowers often pledge receivables as loan collateral. But recent studies show that many companies are collecting receivables slower than they did before the Great Recession. When you review a borrower’s year-end financial statements, ask whether management has taken these five simple steps to turn receivables into cash faster. Tighter collection procedures can expedite service debt and reduce working capital needs and bad debt write-offs.
1. Streamline the billing process
The success of any collection program begins with the billing process. Borrowers can’t collect what they don’t bill, so they need to invoice clients promptly — as soon as the product ships, if possible. Companies that provide services need to track billable hours daily and bill monthly — or as often as permitted under the customer’s contract.
Electronic payment systems allow companies to send real-time invoices and enable online payment. Many companies also ask customers to provide up-front service retainers or make substantial deposits on large or custom orders.
2. Reward early birds and penalize procrastinators
A borrower should know the average collection cycle in their industry and establish a payment schedule that positions them as an industry leader in collections. Enticing customers to pay before the due date may require early-bird discounts, such as a small percentage off bills or value-added perks for customers who pay on time or improve their payment history.
On the flip side, borrowers might consider assessing fees on past-due payments. However, many companies decide to waive late charges when customers immediately resolve outstanding balances, as an act of goodwill.
3. Make collection calls
Does your borrower make courtesy calls to delinquent customers to determine why they aren’t paying their bills? Sometimes there’s an error in the customer’s information (for example, if the customer has moved or changed its e-mail address) or a dispute over the amount invoiced. Discrepancies are more efficiently handled during courtesy calls, rather than waiting until the next billing cycle. Payment plans can help distressed customers catch up on overdue accounts. And promissory notes help prevent them from disputing the charges in the future.
Once an account is more than 30 days old, collection personnel should make regular calls and send e-mail reminders along with copies of invoices to clients who haven’t settled their accounts. If the staff’s efforts are in vain after 60 days, the company’s owner or CFO should step up to resolve the issue.
4. Eliminate risky business
Before conducting any business transactions, borrowers need to review a prospective customer’s payment history, references and credit score to assess its ability to pay bills on time. In other words, borrowers need to conduct due diligence on new and existing customers, similar to your role as a lender.
Poor credit doesn’t necessarily prevent borrowers from doing business with a customer, but they may need to alter the terms they offer high-risk businesses to protect against bad debts. For example, they may need to demand cash on delivery or set a limit on outstanding balances.
5. Look for outside help
When all else fails, borrowers may solicit outside help from an attorney or collection agency. Using a third party allows the borrower to distance itself from the collection process and focus on other important business matters.
Third-party help can sometimes be costly, however. In fact, the fees may consume much of the collection amount. Some agencies work on a retainer basis, but a smaller fee upfront doesn’t mean you won’t still be charged if they fail to collect.
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