Best Practices for Collecting Receivables
When you’re in business, people owe you money. Nearly every business owner has at least a few slow-paying customers or clients—and when they fail to pay, it can hurt the bottom line. For this reason, business owners should follow basic protocols and procedures when attempting to collect their accounts receivable, both to protect the customer relationship if it is salvageable-- and to stay well within legal bounds.
For best practices, I recommend businesses follow the guidelines of the Fair Debt Collection Practices Act (FDCPA) and the Texas Debt Collection Act. While these laws apply primarily to third-party collection agencies, and not the original creditors, they still provide good signposts and safeguards for business owners attempting to collect debts so they don’t inadvertently venture into harassment territory. Additionally, they provide some basic wisdom for sound collection practices. Let’s look at a few A/R collection “don’ts” based on these laws:
-- Don’t call your customers before 8:00 a.m. or after 9:00 p.m. -- Don’t use profane language or threaten violence. -- Don’t call their accounts payable department multiple times a day.
-- Don’t threaten past-due customers with any specific action you are not willing, or legally authorized, to take. For example, don’t threaten to take a customer to court unless you’re genuinely ready to take that step. If the customer doesn’t pay and you don’t follow through with a lawsuit, you will be creating an image of a business that doesn’t follow through and may safely be ignored. If the case does proceed to court, the customer could turn it against you and make you look like the bad guy.
-- Don’t threaten to garnish wages or put a lien on the customer’s homestead. The State of Texas has some of the broadest debtor protection statutes and constitutional provisions of the fifty states. You can only do some of these things in very narrow, specific situations.
-- Don’t continue to call a customer who disputes the debt. Instead, focus on providing proof that the debt is valid.
It's customary in some lines of work to bill on 10-day or 30-day terms, sometimes, even longer. But times are changing, largely due to the nearly universal use of debit and credit cards, and the ease of paying online. That's why the most practical, time-proven tip is to collect your money promptly.
Be willing to extend your customers that convenience. Take their payment at the time of sale if possible. If it is not possible simply because “things aren’t done that way,” then consider offering a small monetary incentive for prompt payment. The old 2/10, net 30 model worked for years. Pay within ten days for a 2 % discount. This can be less or more at your choosing, but be careful that you take into account the merchant fees deducted from the sale and the effect it has on your profit margin.
If you don’t accept debit or credit card payments at the point of purchase or online, then make your terms of payment very clear at the outset of the transaction -- if possible, in writing as part of a contract.
Finally, have your attorney set you up a collection letter series, and religiously follow the send-out schedule. Do not vary from your schedule. Accounts that go past 30 days become significantly more uncollectible than those that are promptly contacted. Do not be afraid to have your legal counsel send out the last letter, whether you plan on taking legal action or not. This often gets results.
Always stay within the bounds of the debt collection statutes when collecting receivables. Accept payment by debit or credit card, and if possible, get all your money at the point of purchase. Offer discounts for prompt payment. Have firm payment terms stated in your contract. For delinquent accounts, adhere to a rigid collection letter schedule, and have an attorney draft both a review and final letter in the series. Do not let accounts go past 30 days.