How to Ease Debt-Collection Headaches

 

What are your choices when your accounts receivables reach 60 to 90 days past due? After all, cash flow is a paramount priority.

Certainly, you don’t want to be too aggressive in debt collection and lose possible revenue from slow-paying customers – they might soon be able to pay you. Even a court judgment isn’t a cure-all. Nor do you want to let your receivables cripple you.

Many businesses face this perplexing problem even though numerous economists believe the recession is over. That’s because of the improvement in the nation’s gross domestic product. But this economy is a new ballgame – unlike what we’ve experienced in recent recessions. Consumers don’t have money to spend so they’re not consuming. Consumer spending usually helps end recessions.

My sense is the unemployment rate is closer to 23 percent. Many unemployed workers aren’t counted because their benefits have expired. Many were forced to accept temporary freelance work or have been self-employed, but when the jobs ended they weren’t eligible for benefits.

Following the last downturn, the Small Business Administration reportedly indicated small businesses with less than 20 workers created 40 percent of the jobs. However, we’re not seeing such job creation in the small business sector. Why?

Here are three salient reasons:

1.       Tight credit has traumatized business. Consider Advanta, the nation’s 15th-largest credit card company with about 360,000 small-business customers. It declared bankruptcy in Nov., 2009 – five months after it cut off all credit to its customers.

Advanta CEO Dennis Alter was quoted by CNN as claiming the economy hurt his company (Bankruptcy filing is a blow to small business). That’s partially true, but there is plenty of evidence to the contrary. Advanta and other credit card companies helped create our nation’s financial mess. Advanta has been repeatedly accused of bilking countless customers with predatory interest rates at higher than 30 percent for dubious reasons, and abruptly cutting credit lines without warning to unsuspecting businesses long before the recession was acknowledged by economists. Little wonder about Advanta’s downfall. Its customers couldn’t pay their credit card bills.

Here’s a representative sample of consumer complaints: http://www.consumeraffairs.com/credit_cards/advanta.html.

Why has Congress allowed certain states to permit such behavior? It also ruins the credit ratings of small business owners and prevents them from getting other lines of credit, not to mention the tight-lending practices of many banks even when businesses have stellar credit. But that’s a big-enough problem for a separate Biz Coach column.

2.      Weaker sales and fewer exports. The red ink cycle in the GDP may be over, but the majority of small business owners aren’t feeling relief. We continue to see universal evidence of the downturn in loss-leader sales and empty commercial space. Personally, during a recent visit to a chamber of commerce in what is perceived as a successful community, I was astonished to see vacant storefronts on all four corners of the nearby intersection of a busy street.

 3.      Mounting healthcare costs. Employers are suffering from double-digit percentage increases. And the root causes of escalating healthcare costs haven’t been solved.

So in view of these woes what can you do to improve your receivables? Consider using the Golden Rule and train your staff in empathy techniques.

The majority of slow-paying customers are likely to be downtrodden, but not mean-spirited. If a slow-paying customer has an otherwise good track record with you, the odds are you’ll see your money when conditions improve – if you practice empathy.

Empathy means a breezy, easy-going approach. Treat past-due accounts like you’d want to be treated. Ask friendly, open-ended questions to get your customers to talk with you. Listen to how they hope to repay you.

Admittedly, in my third year in business, I fruitlessly felt anger toward a client who didn’t follow my counsel and his company consequently fell on hard times. As I dragged my bag of resentment around, it grew bigger and bigger. My obsession was a drain on my emotions.

Fortunately, I remembered a passage in an old best-selling paperback book, “Love Is Letting Go of Fear,” in which author Gerald G. Jampolsky, M.D., related his experience with a non-paying client. Dr. Jampolsky, who was angry over the nonpayment, changed his mind and used a new g0-slow approach to the problem. Soon, he unexpectedly received payment.  But that wasn’t his motive for an easy-does-it approach. He did it for his own serenity.

I decided to try his approach. So when the client owed me more than $4,000, I decided to let go of the problem after being unsuccessful after months of soft-collection efforts. To my surprise – a year later – I got a phone call with a promise to pay in full. Yes, the check arrived three days later and it didn’t bounce.

The experience also taught me other valuable lessons in best-practices:   

1.       Don’t be so eager in taking on new clients and to practice due diligence. I politely turn down new businesses as clients and now only help companies that have some challenges but follow my recommendations. (This philosophy caught the interest of a talented columnist at a nationwide publication in Been There… Done That… Here’s How – New York Times). Even if my firm is paid a retainer in advance, startups don’t work for me because most take up an excessive amount of time at the expense of other valued clients. 

 2.      Closely monitor clients’ progress. I held them accountable if they ignored my suggested best-management practices. 

Five years after my $4,000 surprise, I got an opportunity to see if I indeed learned my empathy lesson:

As I was turning into a parking lot to meet buddies for our weekly sailboat race, a young waitress with a small child rear-ended my late-model vehicle. The damage was slight – about $100. The driver begged me not to report it and promised to reimburse me. I agreed. Soon, I realized the joke was on me – she was not in a position to pay – so I decided to let go of it.

My loyal accountant was chagrined with me.

But just an hour after deciding to let go of the matter, I unexpectedly met a person who formerly worked for one of my clients. He mentioned how my work benefited his ex-boss, and asked me to approach his new employer to offer my services.  A week later, I had a new client, who became my biggest. Not to be gauche, but it was six figures a year in revenue for nearly five consecutive years.

Meantime, my accountant had to remind me to stop chortling over our little disagreement.

However, this doesn’t mean you should ignore collection problems. But don’t approach each customer with a sledge hammer. See the situations as opportunities for growth.

In conclusion, think long-term. As much as possible, treat your customers as partners and use the Golden Rule – treat others as you would like to be treated if you were in a similar plight. What goes around comes around.

Besides, if you use due-diligence with customers early on and use best-practices in management, you’ll be OK. The odds are the majority of your delinquent customers will remember your empathy and will remain loyal after their situations improve.

From the Coach’s Corner, for more on Dr. Jampolksky’s organization, visit: www.corstone.org.