At some point, a customer to whom credit has been extended will not pay on time. With all of the security and other policies and procedures in place to get you paid, the penultimate step is to have a collections policy. There are numerous steps and factors to consider when crafting a collections policy, but the first step is the same as each other aspect of credit policy as a whole — it should be written down, and consistently applied.
Collections Policy Defined
A collections policy is the set of procedures a company uses to ensure payment of overdue accounts receivable. This is a very broad definition, so I like to narrow the focus as “the set of procedures a company uses to ensure payment of overdue accounts receivable, after securing the debt, and before litigation”. Generally, a collections policy systemizes the steps taken to recover amounts due prior to the initiation of litigation, if that step is required. These processes include when a customer should be contacted, how they should be contacted, how disputes are resolved, when internal or external “collectors” are used to step-up collection efforts, and ultimately when and whether to turn the account over to litigation or write-off the debt. Just like a credit policy as a whole, a collection policy is not an off-the-shelf product. Each individual business will likely want to treat the collections policy in a different way.
Just like a credit policy as a whole, a collection policy is not an off-the-shelf product. Each individual business will likely want to treat the collections policy in a different way — some are much quicker to send a sternly worded letter or firm phone call upon late payment, and some will let the account simmer for a short period of time. As with many things in life and business, a moderate approach that balances the reality of the market with the need to get paid according to the terms of the credit extended is likely the best solution. Keep in mind, though, that running a “tight ship” can let your customer know from the beginning of the relationship that you are on top of your credit department, are serious about getting paid, and that follow-up for late payment is part of the process. This can lead to less work later on.
In-House or Outsource?
The first part of any collection policy is generally in-house. The question is whether or not the collection policy should keep the whole process in-house, or if it should be eventually be outsourced, and when that point comes. Of course things like making a nice phone call before the payment is due in an attempt to ensure prompt payment, and even a stern letter after the debt becomes due are things that are easily handled in-house. There are certain things that an outside collection company can do, however, that would strain the time or resources of many businesses.
Outside debt collection agencies can be beneficial for several reasons, including experience specifically in debt-collection, notifying the debtor that the company has escalated the debt collection process, spending time and resources to continually contacting the debtor with letters or phone calls and responding to and locking down promises to pay, reporting the debtor to credit bureaus, and more. Clearly this must be balanced with the cost associated to use an outside collection agency compared to attempting to keep the process completely in-house.
Sample Collections Policy
- ________ days prior to account being due, send an email and make a phone call to the customer thanking them for their attention and business, and reminding them that they have an upcoming payment due date.
- ________ days after due date, make a phone call reminding the customer of the due date, and the balance due.
- If the customer is local, consider stopping by to talk and discuss the account at this time.
- ________ days after the phone call in (2), send a more forceful letter reminding the customer of the overdue balance, the terms under which the credit was extended, and the service charges that are accruing.
- ________ days after the letter in (4), send a letter notifying the customer that the account has been placed on hold, no further credit will be extended, and, if the outstanding balance is greater than $ ____________, that the matter has been turned over to an outside collections agency — turn the account over to a collections agency.
- ________ days/months after the account has been turned over to an outside collections agency, a determination will be made whether to 1) write off the debt; or 2) move from collections to litigation. At this point, you will likely want to send a letter to the client notifying them that their credit account has been cancelled.