Anyone who offers credit to small companies faces a standard business decision of adding new revenue with taking a risk for default and debt collection. If credit terms are set too tight to minimize risk, profitable revenue can be lost. On the flip side, offering terms that are too generous can increase the default rate and hurt profitability.
Regardless of a company’s credit management policies, there will come a time when a customer is late or in default on their account. When this occurs it is important to have a disciplined and aggressive method on place to collect the funds due. In fact, research shows that the longer the debt is allowed to remain outstanding, the less likely it is the amount due will be paid.
The first step in handling any delinquent debt is to communicate with the client or customer. In many cases, an invoice is simply lost or misfiled. Many small businesses are less than efficient at handling their back office operations, and a simple call or notice can resolve the problem. On the other hand, there may be a short-term problem with cash flow, and simple communications can work out an acceptable payment plan.
If an initial courteous contact does not resolve the problem, it is necessary to take more formal steps to resolve the problem. This normally starts with a written request to the debtor, using a standard letter of demand. This requires knowing certain information about the client, and that might require a formal search to update credit files. You can click here for ASIC company name search to help find detailed information about Australian companies. This letter should be sent with a record of delivery with a copy kept on file.
Turning to Debt Professionals
Once the basic steps are taken, it is time to make some basic decisions about what other actions to take. These basically relate back to the risk versus return issue. If the amount owed is small, it may or may not justify investing any further time and effort in the collection process. Factors to consider include third-party costs, legal and court costs, and the real probability of recovering the amount due. If a company is in serious financial problems, collection may be impossible even with court action.
One solution many choose is the use of a third-party collection agency. These firms have a scale of operations and the necessary experience to make collections more effective and affordable. They normally work on a fee basis, where they keep a specified percentage of any funds that are collected. This is one way to pursue collection while minimizing the additional costs and expenses of doing so with internal resources.
From making the initial credit decision to chasing a debt, management will always use the guideline of what is ultimately the wisest financial decision.
