The slower your borrowers are to collect receivables, the more likely it is that they won’t collect at all — leaving your loan collateral at risk. To decrease the possibility of bad debt write-offs, you can educate your borrowers about the need to take some basic actions that will improve their collections. Ask the following questions so you can point borrowers in the right direction.
Do you have a sound billing process?
The success of any collection program begins with the billing process. Your borrowers can’t collect what they don’t bill, so they need to invoice clients promptly — as soon as the product ships, if possible. Businesses that provide services need to track billable hours daily and bill monthly — or as often as permitted under the customer’s contract.
Electronic payment systems can allow your borrowers to send real-time invoices and enable online payment. Many businesses also ask customers to provide up-front service retainers or make substantial deposits on large or custom orders.
Do you have a clear payment schedule?
Your borrowers should know the average collection cycle in their industries and establish payment schedules that position them as industry leaders in collections. Enticing customers to pay before the due date may require early-bird discounts, such as a small percentage off bills or value-added perks for customers who pay on time or improve their payment history.
On the flip side, your borrowers might consider assessing fees on past-due payments. But many businesses decide to waive late charges as an act of goodwill when customers immediately resolve outstanding balances.
Are you making calls?
Your borrowers should be calling delinquent customers to determine why they aren’t paying their bills. Sometimes there’s an error in a customer’s information (for example, if the customer has moved or changed its email address) or a dispute over the amount invoiced. Discrepancies are more efficiently handled in a phone call than by waiting until the next billing cycle. Payment plans can help distressed customers catch up on overdue accounts. And promissory notes help prevent them from disputing the charges in the future.
Once an account is more than 30 days old, your borrowers’ collection personnel should make regular calls and send email reminders along with copies of invoices to customers who haven’t settled their accounts. If the staff’s efforts are in vain after 60 days and the balance is significant, the owner or CFO should step up to resolve the issue.
Are you conducting due diligence?
The old adage that prevention is the best medicine applies to collection issues, too. Before conducting any business transactions, your borrowers need to review prospective customers’ payment histories, references and credit scores to assess their ability to pay bills on time. In other words, your borrowers should conduct due diligence on new and existing customers, similar to what you do as a lender when considering whether to make a loan.
Poor credit shouldn’t necessarily prevent your borrowers from doing business with a customer, but they may need to alter the terms they offer high-risk customers to protect against bad debts. For example, they may need to demand cash on delivery or set a limit on outstanding balances.
Are you using outside professionals?
When all else fails, your borrowers may solicit outside help from attorneys or collection agencies. Using a third party allows a business to distance itself from the collection process and focus on other important business matters.
Third-party help can sometimes be costly, however. In fact, the fees may consume much of the collection amount.
Ask the right questions
To avoid the problems of dealing with borrowers whose collateral has gone south, be active in asking the right questions and providing the necessary support. Taking these actions now will both ensure your loans are secure and cement your relationships with borrowers.