Steps In Accounts Receivable Collections

Making decisions on who to extend credit to, and collecting accounts receivables has always been a difficult part of running a small business, as the wrong decision or procedure for handling collections can have disasterous consequences.

According to some pretty scary collection industry figures, less than 15% of past due items put in for collection are actually paid.  But I wonder if that figure could be increased if companies would be more careful about who they’re extending credit to, stop lending when they know there’s a problem, and monitor customer payments and their on-going credit status more closely.

In the second of a series of posts about collecting receivables in the NY Times “You’re the Boss” section today, Jay Goltz outlines advice from his collection attorney Ira Helfgot in an article entitled “Six Things You Should Know About Collecting Receivables“:

Jay writes:

“In my last post, I explained how my lawyer, Ira Helfgot, who is president of the Illinois Creditors Bar Association, helped me collect a serious and seriously late receivable. Mr. Helfgot also gave me a quick six-point primer on the world of credit collection that I will share with you:

1. Many businesspeople think that if they get a lawyer to send a letter, the customer will pay. This is usually not the case. By the time it gets that far, your customer is probably not paying a lot of people and those people are all getting lawyers to send letters.

2. Collection agencies work on a percentage basis and generally do not file lawsuits to collect. Instead, they write letters and make telephone calls. But if a letter from a lawyer won’t work, neither are letters or telephone calls from a collection agency likely to work.

3. From a business standpoint, most lawyers don’t take collection matters because the business owner does not want to pay the lawyer on an hourly basis (otherwise known as throwing good money after bad), and most collection matters are too small to yield a reasonable fee for the lawyer on a percentage basis. (The standard contingency fee for lawyers is one-third, but there are lots of variables and the rate is open to negotiation.)

4. Most collection lawyers are willing to take small matters on a percentage basis but would rather not take a single file; most of their clients have hundreds of files. Various state or national bar associations, like the Illinois Creditors Bar Association, the National Association of Retail Collection Attorneys and the Commercial Law League of America may be helpful in finding a collection attorney.

5. In Illinois, a corporation can file a claim without an attorney if the claim is $2,500 or less. But filing a claim does not automatically result in obtaining a judgment, and obtaining a judgment does not automatically result in getting paid. This is a time-consuming and difficult process. Lawyers get paid for their time and expertise – just as you do.

6. Companies frequently wait too long to turn a bill over to a lawyer or compound their error by extending even more credit in a risky effort to double down. You need to know when to say when so that there is money left to get.”

One of the most dangerous mistakes that many small business owners make is to extend credit to companies and individuals who aren’t credit worthy, in order to make that additional sale.

Particularly in difficult economic times, companies should avoid extending credit wherever possible, and when they do, to try to work out credit card authorizations or L/Cs, and to keep a constant eye on the financial status of your customers.  Also, don’t be afraid to pull the plug when necessary or start collection proceedings early enough.

What are your experiences with accounts receivable collections?

Susan Martin, Small Business Financial Management