43% of small businesses have customers who are 90+ days past due on payments, and almost every small business will have at least 1 past due customer, at some point. According to recent research from Dun & Bradstreet, businesses are taking a whopping 52.1 days, on average, to settle their debts- well over the usual 30 days used in most payment terms. The lion’s share of past due payments are large companies with over 500 employees, but a significant portion of unpaid bills will be the result of the three most common reasons for delinquency: disorganization, sudden and unexpected financial expenditures, and poor cash flow. Each requires slightly different collection strategies to increase the likelihood of success.
Overall, you’ll be more successful collecting payment from delinquent customers if you have a prepared response to some of the most common excuses or reasons for delays in payment. As the conversation continues, remember to keep track of what the customer said, and when, in order to remain firm and cite specifics during subsequent discussions (doing this making successful collection more likely).
The first and most important thing to remember with your collection strategies is to remain polite and understanding. Discussions with those underlying foundations are more likely to result in payment than tense, argumentative, or blame-based collections communication.
Here are the best collection strategies for the most common types of delinquent customers:
1. Disorganized customers
Disorganized customers can best be handled by either applying penalties for past due invoices (charging interest) or by persistent collections communication efforts. If the disorganized business knows you’re diligently monitoring your client’s AR, they’ll prioritize the invoice as soon as it comes in. It’s fairly easy to convert a disorganized customer into a regularly on-time payer with either of these collections strategies.
Proactive reminders are an especially helpful collections strategy for this customer. FG Receivables Manager app users should make note of the “current” customer listing, and send their “disorganized customers” an Almost Due Invoice payment reminder, located above the standard payment reminder templates.
2. Customers with cash flow problems – Delinquent customers who are merely experiencing momentary or minor cash flow problems can be converted to on-time customers through two collection strategies:
A) For delinquent customers with the most minor cash problems, demonstrate that you mean business by beginning your collections communication as soon as the invoice is past due, and as soon as the invoice reaches each additional category/stage of lateness. Be persistent in your follow ups. This type of communication strategy will lead a delinquent customer to prioritize your invoice over others, because they’ll know they’ll be hearing from you if they don’t. FG Receivables Manager users should upgrade the customer to the next available collection letter template as they enter each new “past due bucket” on the home screen.
B) If a delinquent customer is having more consistent cash flow troubles, you’ll be more likely to successfully collect payment if you offer them different payment options, like structured payment plans, discounts, or a suggestion of a small business loan service. FG Receivables Manager users should direct their customers to check the “Get Access to Capital” link, located at the bottom of the payment reminder emails. Any small business with a cash flow problem can also refer these businesses to use the FG Receivables Manager (& you’ll get cash if they sign up!). Email [email protected]ingGates.com to get set up as a referral partner.
3. Customers in danger of going out of business – If your research into the company has turned up turned up troubling evidence that the company may be in danger of going out of business, it’s important to begin with the more emphatic collections communication strategies. Begin the collections communication with a “medium” or “harsh” collection letter template or collection letter call script. Be persistent with your collections calls, and make sure to include the business’ leadership roles in your emails.
If time passes and the “apply the heat” communication strategies do not work, offer them a variety of payment options to hopefully collect some of the invoice.
If they do go out of business: With a Chapter 11 or Chapter 13 filing, the company’s goal is primarily reorganization. As per the court, they will still be required to pay their debts, according to a repayment plan (that the court sets up). If the business files a Chapter 7 bankruptcy, it means they are shutting their doors permanently and are not held liable by the courts for their debts. Any individuals related to the business are given a “fresh start” by liquidating assets and discharging debts. You are more likely to successfully collection from a Chapter 11 or 13 bankruptcy filing than a Chapter 7 bankruptcy filing. Keep an eye out for a “341” notice. This will spell out 1) the type of bankruptcy filed; 2) the date the case was filed; 3) the court in which the case is being heard; 4) the deadline to file a proof of claim; 5) the time, date, and place for the first meeting of creditors; and 6) the rules for collecting what’s owed to you.
After the business files for bankruptcy, you can not longer attempt to collect from them, it’s prohibited by the bankruptcy code. In this instance. contact the attorney or court appointed trustee to work out an arrangement on how your debt is handled in the bankruptcy proceedings.
4. Difficult Customers – A “difficult customer” is one who claims to be dissatisfied with your services provided (but only well after the invoice was due), who blatantly lies during the collections process, who avoids you to duck out of payments, or a customer who takes any other similar action to the ones described here. The most successful overall collection strategy for this type of customer is to remain polite at all times and to cite specific dates and policies. These types of customers are usually best handled with an AR Management App that has CRM features.
- Send them their payment reminder letters with certified mail.
- Absolutely ensure you are recording all phone communication (as well as written or emailed communication).
- Repeat back to them details from previous correspondence so there is minimal “wiggle room”. Email them a summary of the conversation and ask them to confirm, to get all agreed upon details in the written record. FG Receivables Manager users can previous read emails sent and listen to previous call recordings in the customer’s history log.
- Alert them that you will continue your collection efforts until a suitable resolution is found
- Warm them about late payment penalties (give them one offer to forgive those penalties)
- Include senior leadership or other departmental members in your correspondence (email and certified mail). FG Receivables Manager users can CC’d in any additional email they’d like when sending out payment reminder emails.
5. Genuinely Dissatisfied Customers – Remain apologetic, and admit your mistakes. Assure them it will not happen again. Send them flowers, chocolate, food, or similar items as a gesture of goodwill. Try to find a payment solution, such as a discount or credits for future purchases. FG Receivables Manager users should make a note of this instance in the customer’s contact details so that any other team members interacting with this customer are fully briefed on their history as a customer.
Do you small business owners have any additional tried and true collection strategies? Are there other types of customers that you commonly have to deal with? Share in the comments so together, all members of the FG community can be more informed.