Keeping Clients Who Are Forever in Your Debt Out of Arrears


The dot-com crash and economic slowdown are causing credit and collection headaches for many businesses, as New York publicist Steven Blinn knows too well.

A few months ago, he noticed that some of his accounts were growing increasingly delinquent. Worse, two dot-com clients stopped paying altogether.

"When times are good, you get so busy, you may not look at collections," Blinn said. "But when times are slow, you do. And you say, 'How did things get like this?' "

To shield his company from further financial losses, Blinn outsourced his bookkeeping and collections to an experienced professional and set up a two-year payment plan for one of his distressed dot-com clients.

Blinn now is trying to figure out how to recoup the $19,000 owed to him by the other dot-com but worries he'll never see it.

During the recent economic boom, many companies liberally extended credit to financially risky customers hoping that the income from increased sales would offset any bad debt. Today, some are regretting their actions.

Mounting delinquencies, escalating debt write-offs and customer bankruptcy filings are shrinking profit margins. Advertising agencies, media and publicity firms have been hit hard, credit and collections experts said.

"When the dot-coms crashed, they left a lot of people in the lurch," said Paul Mignini, president of the Credit Research Foundation and the National Assn. of Credit Management in Columbia, Md.

Businesses must strike a delicate balance between seemingly contrary goals: increasing revenue while reducing credit risks. They also must find ways to quickly transform receivables into cash.

Many are automating their credit analysis, invoicing, collections and cash application functions, said Lyle Wallis, vice president of the Credit Research Foundation.

They're using predictive dialers to increase their collection calls. Firms also are becoming more conservative in extending credit and more aggressive in collecting debts.

"If you're a fairly large company, even the reduction of a single day of [outstanding debt] can result in a multimillion-dollar impact on your bottom line," said Venkat Srinivasan, chairman of in Boston, a credit technology firm.

Should your company be experiencing account delinquency difficulties, it might be time to beef up your credit and collections policies and procedures.

When opening new accounts, get credit reports from investigative agencies. Request audited financial statements, credit references and other evidence of credit-worthiness from new customers.

If a new client's finances seem shaky, you might be able to do business, provided you protect yourself. Ask for a personal guaranty from one of the firm's officers or a bank's stand-by letter of credit. And if your financial policies permit, request a lien, deposit or prepayment, or assist the potential customer in securing outside financing.

Consider limiting your risk of catastrophic loss by purchasing credit insurance.

Make sure that your firm isn't the problem. Has your staff fallen behind in applying payments? Are they slow to resolve billing and merchandise disputes?

Initiate a diplomatic collection call when accounts first become somewhat past due. Remember, the squeaky creditor gets the check. Debtors are more likely to pay the firms who call them first about outstanding balances.

If your company passively permits its customers to pay well beyond terms, you're telegraphing the message: "Late payments are fine with us."

"The worst thing you can do is kid yourself into believing that they'll pay you as week after week goes by," said Forrest Old, executive vice president of Dun & Bradstreet Receivable Management Services in Bethlehem, Pa., which specializes in B2B collections.

Focus on collecting larger balances first. When setting up payment plans, consider customers' track records with your company. Assess their credit and payment histories. In the past, have they kept promises to pay past-due sums?

If your staff is already overburdened with responsibilities, consider outsourcing the duties to firms that can process your invoices, evaluate new customers' credit-worthiness and collect your past-due debts.

In some businesses such as the garment industry, companies can sell their accounts receivables to third-party "factors" to generate cash before their outstanding invoices are paid. Factors typically charge 2% to 6% of fees to be collected.

Whenever possible, ask severely delinquent customers to make weekly payments. Request a first payment from them within three to five days of your conversation so they won't later forget or ignore your agreement, said Terry Taylor, chairman of Attorney's Business Services in Westminster.

Put the arrangement in writing and have your customer confirm its terms. To obtain faster returns, request that delinquent customers wire-transfer sums, make over-the-phone credit card payments, or authorize checking account deductions. Systematically review the accounts to be sure that promises are being kept, he said.

Visit customers with high outstanding balances or long-term unresolved delinquency problems. This will not only foster goodwill but might increase your chance of returning to the office, check in hand.

As an account ages, it becomes more difficult to collect. Credit experts say that firms have about a 90% chance of collecting debts up to 60 days delinquent. But they have only a 50% chance of recovering a 90-day-old debt; and a 20% chance of collecting a 180-day-old debt.

Overcome the most common excuses. Lost invoices? Consider faxing or e-mailing duplicates during each billing cycle.

If your best efforts fail, consider a collection agency or attorney. Selling delinquent receivables to an agency or attorney group is another option. Debt sales are booming, reaching $103 billion last year, more than double 1999's $49 billion, according to Faulkner and Gray's Credit Collections Directory. Debt buyers pay between 1% and 13% of a debt portfolio's overall value if the payments have been outstanding for six months or more, said Patrick Beharelle, president of Collections X, a B2B debt exchange in Atlanta.

Other ways include suing nonpaying customers or engaging them in mediation or arbitration. Should a former customer inform you that it's going out of business or about to file for bankruptcy protection, consider proposing a quick settlement.

By handling your customers' delinquencies with diligence and diplomacy, you can cultivate long-term, loyal relationships and possibly positively affect your bottom line.

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