Nine Self-Defeating Collection Errors
The Art of Debt Collection Includes Avoiding the Pitfalls
In the complex world of business-to-business commerce, debt collection, though sometimes unappreciated, remains a critical yet delicate process. As companies strive to maintain healthy cash flows and strong customer relationships, the approach taken to collect outstanding debts and the skills employed can make or break your firm’s financial stability and the collector’s professional reputation.
Effective debt collection is not just about recouping owed funds; it's an art that requires finesse, legal awareness, and strategic communication. Whether you're a small business owner handling collections personally or part of a larger organization's credit department, understanding the nuances of the collection process is crucial.
How Collections Can Fall off the Rails
One of the common themes driving business clients to engage my services involves rising Days Sales Outstanding (DSO). In some cases, the cause has been a structural problem unrelated to their collectors’ efforts, situations caused by upstream issues in the order-to-cash (O2C) process. Other times, the problems were directly related to collection practices. The client understood they had a collections problem but could not solve it themselves. Here are a few examples of where collections got off track:
A regional firm selling gravel and stone to the construction industry struggled to get DSO under control. Although experienced and well-qualified, their small credit department was distracted from doing collections by other responsibilities. As a result, not enough collection activity was going on, that activity was inconsistent, and old past-due balances were being held on the books too long. The situation was resolved by implementing measures to give collections the required priority and streamlining the staff’s credit-related responsibilities.
A mid-sized manufacturer that sold metal fasteners encountered problems implementing a new accounting software package. DSO ballooned because it became difficult for the collectors to document customer receivables and identify disputed items. To clear up the problems, the credit staff was doubled by bringing in temporary employees to stay on top of recent past-due balances and by working with a collection agency to address the build-up in over 120 days past-due receivables.
A credit manager at an office products manufacturer selling through a dealer network had difficulty controlling his emotions. Consequently, he got into arguments with dealers, which impeded his ability to work out payment plans and created customer service issues. With DSO increasing, his collection responsibilities were distributed to other credit department staff members while he went through additional training.
Effective debt collection requires a strategic approach that emphasizes empathy, clear communication, and flexibility. This involves listening to customers' situations, explaining debt details clearly, and offering flexible payment solutions such as installment plans. Gradually escalating collection efforts while maintaining a respectful tone is also crucial. Leveraging technology can enhance communication consistency and personalization as well as dramatically increase productivity. Moreover, training staff in customer service and conflict resolution ensures that interactions remain professional and empathetic.
By combining these strategies, businesses can recover debts effectively while preserving customer trust and loyalty. It’s part science and part art. It also helps when you understand the collection pitfalls one needs to avoid.
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Nine Mistakes Collectors Must Avoid
The following discussion outlines nine common mistakes that collectors should be wary of. By avoiding these pitfalls, businesses can improve their collection success rates while maintaining ethical standards and preserving valuable customer relationships. Let's explore these critical errors and learn how to navigate the challenging terrain of debt collection with professionalism and efficacy.
Failure to provide proof of the debt: You need to be able to provide evidence the debt is valid and owed by the business in question. Your invoice must be accurate, matching the customer’s purchase order, and backed up by proof of delivery or a signed service ticket. Otherwise, the business may have grounds to dispute the debt and avoid making payment.
Harassing or threatening the customer: With business debts, in most cases, you are talking to an employee, not the owner, so keep it professional. Using profanity, making repeated or excessive phone calls, berating the other party, or threatening legal action that is not warranted is counterproductive and can leave you open to legal action. If you tell the customer you are going to turn their account over to a collection agency or attorney, you need to actually do that within a reasonable amount of time.
Sharing information about the debt with outsiders: Don’t disclose information about a business customer's debt to anyone other than its authorized representatives. This is why faxes are problematic. If they don’t go directly to the recipient’s workstation, the wrong people might intercept the message. The only exception regarding information disclosure involves reporting a customer’s payment habits to a credit bureau or industry credit group.
Misrepresenting the amount of the debt: Don’t make false remarks about the amount of your customer's debt or the terms of repayment. This can include misrepresenting the interest rate, late fees, or other charges that may be added to the debt. This also includes adding unauthorized fees or charges to the debt, trying to collect interest, or other charges that are not allowed by law or your credit agreement.
Continuing to try to collect disputed debts: If a business disputes a debt, you need to stop trying to collect the debt while the dispute is being resolved. You should insist they immediately provide documentation to prove that the debt should be invalidated. If it isn’t valid, you can resume your collection efforts. If it is valid, and you continue trying to collect, you may open your company up to legal action, not to mention lose any additional sales from the account.
Letting distractions impact your collection efforts: Collections require focus and commitment. Too often, collections are treated as an afterthought when they should be a priority. If you don’t make the required commitment of time and effort, collection results will suffer.
Irregular collection efforts: Your collections also need to be regular, systematic, and progressively aggressive (here’s more information on an effective collection process). Irregular collection efforts lack the continuity that increases the impetus for the customer to pay. Lapses in time between collection efforts only serve to age the receivable further and increase the likelihood it won’t be paid. Failure to follow up on a customer's promise to pay is a waste of your time and previous efforts.
Holding onto a debt too long: If you have consistently tried to collect a debt over two or three months without any payment forthcoming, the likelihood you will collect the debt in the next month or two is slim to none. Don’t continue wasting your time. Instead, turn the account over to a collection agency or attorney.
Reliance on flawed processes: Sometimes, this can be related to the IT environment. Systems that create barriers to working efficiently will hurt collections, impediments such as excessive key-stroking, a lack of integration with communication tools, and an inability to record activities in sufficient detail. When that is the case, you may need to revert to manual processes. Whether your processes are manual or automated, visibility into accounts receivable balances and customer transactions is critical to your collection efforts.
Some Final Words on Preparation & Persistence . . .
To be an effective collector requires being prepared. First and foremost, you must understand what is owed. Otherwise, you will not be able to communicate effectively should the customer have any questions or raise any issues. Collectors also need to understand the situation if they are to convince the customer to pay what is owed. For example:
Is an order pending?
Is the customer’s credit limit at risk of being reduced due to their payment behavior?
Are there items being disputed?
Is the customer in an industry that is under economic pressure?
Understanding the customer’s circumstances enables a good collector to apply the proper leverage and recommend an acceptable solution.
It’s also vital that collectors be prepared to overcome objections if they are to be effective. There’s a saying that selling doesn’t begin until the customer says no. The same is valid for collecting. Top collectors are at their best when customers claim they can’t pay. And that is where persistence also comes into the picture. Successful collectors are prepared to overcome objections and are persistent in their efforts without being obnoxious. Ultimately, their professionalism shows through.