Commercial Collections Billing Practices Advice
Swiftness is the key to collecting past due commercial accounts because commercial accounts depreciate more faster than consumer accounts.
In creating and implementing a billing system, a credit grantor should recognize that time is the safest refuge of any debtor. The more time they are given, the less likely they are to pay. Hence, sales documents should be explicit about payment terms, return privileges, interest charges on overdue accounts, guarantee and service costs.
Various Commercial Collection Programs Used
A series of letters used together with an account aging sheet or data printout will help to track slow-paying accounts.
All systems should have an organized and mechanical follow-up of accounts at regular intervals, for instance, 30, 60 and 90 days past due.
It is essential to establish regular billing and commercial collections procedures. Follow up on every account to the point where contactor lack of contactwith the customer indicates some alternative action should be taken.
Help Commercial Collections From The Beginning
Built-in commercial collections controls at the time of sale often assist in receivables recovery and help avoid delinquencies. These include such items as sales contracts or a well-defined vendor’s purchase order with conditions of sale clearly spelled out. Appropriate terms should be printed on sales documents (contracts, invoices, statements) clearly and without fail. Such terms will include notice of interest charged on overdue accounts and discounts granted for prompt payment.
Internal control of receivables should include an aging which permits periodic evaluation. This should fit together with commercial collections routines. The time for referral to a professional commercial collection agency should come from the aging at 60 or 90 days past due, and sometimes sooner.
After a first statement has gone unheeded, start your commercial collection procedure. Any program that permits three statementsor a two to three month time lagbefore the first collection step is taken will result in a lower recovery ratio.
Any procedures for handling slow-paying accounts should emphasize speed in contacting the delinquent bill payer. A company with a past-due account on your books is probably in the same condition with a number of other suppliers. The debtor may be on the verge of serious financial trouble, and the creditor who moves first is most likely to recover their money.
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Commercial Collections And Credit Granting
It is estimated that billions of dollars in delinquent commercial credit is currently being carried on the books of both American and international businesses. This figure changes as our economy grows or contracts. Increased competition, diversification of product lines seem to indicate that these figures will continue to move upward. Regardless of the state of either the national or international economy, the necessity to grant credit and to collect commercial receivables using professional methods remains vital to all businesses.
Credit Sales Volumes Are Important
The average commercial business sell between two to five percent of their products for cash. The credit department is responsible for the other 95 to 98 percent of the goods and/or services sold. Businesses have varying percentages of their financial resources tied up in receivables. Actual losses might range from one-half of one percent to five percent of sales without serious results. This depends on profit margin and other factors. Losses can explode to significant sums very fast if not restricted by the credit manager.
Good Customer Relations Are Paramount
The credit department must also be in tune with customer relations. This quality is absolutely necessary in order for the company to prosper when selling on credit. It is very, very easy to say “no” to prospective customers, and it is also very easy to firmly demand payment at the time of the sale. If this attitude reduces sales, then the credit department is not performing its complete function, which is to create a balance between sales and collection of money.
When extending credit to a new customer, the following basic information should be harvested for your credit evaluation and kept on file:
Is the firm individually owned, a partnership or a corporation?
You must obtain full names of owners, partners or officers and all business addresses. This is a must. A follow-up form letter to the hastily approved customer may supply this information and the local city directory may be helpful with details of ownership or tenancy. You should, however, get the information before delivery of the merchandise.
How long has the applicant been in business?
Statistics show that 50 percent of business failures are firms less than one year old, 75 percent are less than five years old.
At what bank does the applicant do business?
What is the average size of his bank balance and are there any loans outstanding? The customer may have a financial statement which will reveal this, and certainly a phone call to their bank manager is in order. They might only confirm the existence of an account, unless your customer pre-approves release of the details. A carefully worded and signed application will gain you the most information.
What do the records show?
Are financing agreements kept, or have legal suits been filed? If the amount of credit requested is substantial, additional financial information may be secured from an outside credit information source such as another supplier trade association or business reference. n What are some of the business firms with which the applicant is currently dealing? You will want to check with at least three companies to determine how much credit has been extended and the creditors’ payment experience with the applicant company. This procedure may help you and other businesses in exposing customers who exploit their suppliers.
Search for Patterns of Problems
It is a constructive idea to analyze those customers who have become collection problems and to note reasons for their delinquency. A pattern will probably be revealed.
It may be found that some collection problems involve businesses which were in operation less than a year at the time credit was originally granted. This is a “red flag.” It does not mean that a new business should be denied credit, but it does mean that additional information should be obtained to ensure that the business is potentially a good credit risk.
Sometimes the credit manager will have to deal with a sales person who is overanxious or under-trained. In the desire to sell, they may make promises that lead to collection problems. When such a pattern develops in an area, it would then be wise to advise the sales manager about the problem. It is often expedient with large orders to send the potential customer a letter spelling out credit terms.
Some Delinquencies Are Unavoidable
It is inevitable in granting credit that certain conditions cannot be foreseen and that there will be unavoidable delinquencies.
It is usually acceptable company policy that credit losses within certain percentage limits can be sustained, as growth can only be achieved by reasonable risk taking. Reserves for bad debts and collection costs are an acceptable and recognized expense for business. A too-tight credit policy can dry up potential growth. A too-loose credit policy can be a great expense.
By granting credit intelligently and by following good billing and collection procedures, it is possible to hold risk to an acceptable figureto a balance between company growth and losses due to bad debts.
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Learn About Commercial Collections Agencies Fees
As with any other service, there are good and bad commercial collection agencies. Beware of any agency that offers you cut rate commissions far below the accepted Commercial Law League rates, offers you kickbacks on commissions, or makes outlandish promises about recovery success.
You should investigate, evaluate and rate the commercial collection agencies that you plan to use just as carefully as you do with customers when you grant credit. Here are some suggestions:
Use Commercial Collection Agencies That Specialize In Commercial Collections
If you consider a nationally known commercial collection agency or network, ask for references within your industry. Call these references to see how satisfied they are with the agencies success rate, and how quickly they remit the funds collected.
If you consider a local commercial collection agency, in addition to checking references, also ask for financial information and the name of their bonding insurer. Check with the insurer to confirm coverage and claim experience.
Check with other credit professionals in your own industry to see what commercial collection agencies they use. Many commercial collection agencies specialize in a particular industry. This can be an advantage because these agencies usually know the debtors, and are familiar with the industry conditions. Many of these agencies also provide adjustment bureau services, where they will provide space, secretarial services, and perhaps even legal counsel for debtors and creditors to attempt out of court settlements.
Using A Commercial Collections Agency
When you turn an account over for collection, make sure you give the commercial collection agency a complete package. This should include:
A Statement Of All Charges
Copies of purchase orders, invoices, proofs of delivery, contracts, etc.
Photocopies of customer’s checks for any partial payments.
Any correspondence sent or received on any of the outstanding items together with any claims of shortages, non-conforming goods, breakage, or returns.
If you have personal or corporate guarantees and/or any security agreements, include copies of these, along with copies of any UCC forms showing the dates filed.
The more back-up detail the agency has, the better it can work for you. If the matter has to go to suit, you would have to provide this information anyway, so you might as well do it at the beginning of the process. If any paperwork is missing, it gives you time to locate it.
Unless there is a good reason for you to become involved (i.e., a return of merchandise or a valid claim which reduces the amount owing, and you issue a credit memo) do not interfere with the process between your customer and the agency. You hired the agency, so let them do their job. Many times a customer will contact you, and try to make a deal so they won’t have to pay collection charges or have their reputation tarnished. The customer may also threaten you with a counter-suit because of a product problem or state that if you press the claim, they will never again do business with you. Stand firm, however, if they do threaten suit, let the collection agency and your own legal department know about it.
Before you place a claim with an agency, you should have determined whether you plan to eventually press for suit and judgment if the agency cannot collect amicably. You do not necessarily have to let the agency know of your decision at this stage, but you should have a plan of action in place.
Dealing With Agencies & Attorneys: Fundamental Terms And Principles
Commercial Collection Agencies Fees
The fees charged for the collection of claims may differ from agency to agency. There are also various types of fee arrangements that may be established.
A “commission” is the compensation payable by a creditor and earned by a receiver for services rendered in effecting collection of a commercial claim. It is normally contingent and computed as a percentage of the sum collected.
A “retainer” is a sum of money paid in advance to retain the services of an attorney and should be taken into account in determining the ultimate fee to be charged for services rendered and results obtained.
A “suit fee” is a fee payable to the receiver, in addition to the commission, for legal services rendered by the receiver for you, involving court action concerning the prosecution of a commercial claim. The “suit fee” is intended to apply to the handling of the litigation, including post-judgment proceedings.
Defense of a counterclaim is considered a separate action, generally handled under a separate fee arrangement. The authorization for suit does not necessarily imply the authorization to defend a counterclaim. A specific authorization and fee arrangement should be discussed at the first hint of a counterclaim.
The amount of the suit fee is a matter of contract between the receiver and the creditor, as is the question of whether the suit fee is to be contingent or non-contingent, or partly contingent and partly non-contingent. A suit fee, if earned, is payable in addition to commissions. It belongs exclusively to the receiver unless there is a division of service and responsibility between the receiver and an attorney forwarder. The suit fee agreement preferably should be entered into before suit is commenced, and the fee should be commensurate with the services rendered, the amount involved, and the results accomplished.
“Court costs” include, but are not limited to: sums required to be deposited for filing an action, fees paid for the service of process and witness fees. You as the client, should first approve other out-of-pocket costs before they are expended. Unless otherwise agreed by you, telephone calls, skip-tracing investigation, postage and expenses for the duplication of material are considered normal office operating expenses absorbed by the receiving attorney. At no time should a receiving attorney incur unusual out-of-pocket expenses without the creditor’s approval.
Claims
Agencies deal with the collection or settlement of claims asserted by one individual or business entity against another. There are two types of claims. A “commercial claim” is an obligation incurred during the course of conducting a business which arises from goods sold or leased, services rendered, or monies loaned for use in the conduct of a business or profession. A “retail” or “consumer claim” is an obligation incurred primarily for a personal, family or household purpose.
Not all commercial accounts are based on open account balances; some claims may be based on lease agreements, security agreements, consignment transactions, guarantees or on almost limitless variations of similar business transactions. It is necessary that the agency be familiar with the available legal means of effecting collection of such specialized types of claims. This requires specialized knowledge of creditors’ rights with respect to perfecting a lien, enforcing a security interest, as well as effecting collection.
Forwarders/Receivers
A “forwarder” is the agent of the creditor who refers claims to attorneys for collection. A forwarder may be an attorney, a commercial collection agency, or a credit insurance company that acts on behalf of the creditor in the referral of claims for collection. The attorney who receives the claim is a “receiver”.
Claims emanating from a forwarder are usually forwarded to an attorney because the debtor is outside of the forwarder’s jurisdiction and the forwarder has been unable to obtain payment. Forwarding is approved by the prior express authorization of the creditor-client for whom the forwarder serves as agent. Thereafter, you, the creditor becomes the client of the attorney. The forwarder, however, continues as agent, to facilitate the handling of the claim between the receiving attorney and the creditor. Because forwarders have certain expertise and are relied upon by the creditors, it is the usual practice that all correspondence and contact by the attorney with the creditor be through the forwarder.
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How To Write Commercial Collections Letters
It is sometimes valuable to bring the sales manager into this step of the collection process. Information concerning the delinquency can often be obtained from the sales department.
Tips for Commercial Collection Letters:
When writing commercial collection letters, these points should be considered:
Include all basic information.
The commercial collections letter should state how and when you expect payment. It should suggest why the account should be paid in full. It should motivate the debtor to actually do thisnow.
Use an effective style of writing.
Most commercial collections letters are written to appeal to the writer and not necessarily to the delinquent customer. Appeal to the debtor.
Use the “you” approach.
Too many commercial collection letters emphasize “we.” Avoid such phrases as “we insist,” “we remind” and “we want.” It is much better to put the customer into the letter, saying such things as “you will appreciate” and “it is to your advantage.” Remember that the debtor is not interested in your best interest, but in their own.
Don’t say, “We will not write again.”
This assures the debtor of their success in evading payment, and a phrase such as “to keep your good credit rating” may be impractical in a situation that has reached a certain stage of commercial collection.
Use motivating factors.
If a customer has not paid, there is a reason for it. Although a letter cannot discover the reason, it can give the customer a way in which they will benefit. For example, by paying now, they may continue to enjoy “open account” terms, or your credit rating won’t be damaged.
Appeal to pride, honesty and security.
As a last resort, appeal to anxiety. These are factors that can be used to bring prompt payments.
Address the letter to an individual.
Direct it to the person who is authorized to initiate payments. Keep the letter short. Be as brief as possible, and cover only the most important points.
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