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    How to Collect the Money People Owe You: A Complete Step-By-Step Credit and Collections Guide for Small Businesses and Individuals
    How to Collect the Money People Owe You: A Complete Step-By-Step Credit and Collections Guide for Small Businesses and Individuals
    How to Collect the Money People Owe You: A Complete Step-By-Step Credit and Collections Guide for Small Businesses and Individuals
    Ebook386 pages5 hours

    How to Collect the Money People Owe You: A Complete Step-By-Step Credit and Collections Guide for Small Businesses and Individuals

    By Gini Graham Scott

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    About this ebook

    HOW TO COLLECT THE MONEY PEOPLE OWE YOU is a complete credit and collection guide for the small business and individual an invaluable resource that will help you establish effective credit policies, collect overdue bills quickly, and increase the money available to you.

    HOW TO COLLECT YOUR MONEY shows you: How to decide when to send polite reminder notices, when you should send stronger letters, when you should make a collection phone call, and, finally, when you should resort to hiring a collection agency or an attorney. How to determine if a consumer or business should be extended credit and how much. How to collect from overdue accounts while maintaining them as future customers or clients. How to collect money from impossible debtors or deadbeats who have no intention of paying their bills. The book includes sample scripts for collection phone calls, sample collection letters, and important legal guidelines.

    LanguageEnglish
    PublisheriUniverse
    Release dateMar 30, 2009
    ISBN9781462041787
    How to Collect the Money People Owe You: A Complete Step-By-Step Credit and Collections Guide for Small Businesses and Individuals
    Author

    Gini Graham Scott

    Gini Graham Scott, Ph.D., CEO of Changemakers Publishing and Writing, is an internationally known writer, speaker, and workshop leader. She has published over 50 books with major publishers on various topics and has written over 3 dozen children's books. Her published children's books include Katy's Bow, Scratches, The Crazy Critters First Visit, and Where's the Avocado? published by Black Rose Writing. She has published 8 children's books through her company Changemakers Kids and is a member of the Society of Children's Book Writers and Illustrators. She does workshops on self-publishing and creativity. She also helps clients write books as a ghostwriter and self-publish or find publishers and agents. Her websites are www.changemakerspublishgandwriting.com and www.ginigrahamscott.com.

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      Book preview

      How to Collect the Money People Owe You - Gini Graham Scott

      CHAPTER 1:

      Establishing Your Financial Policy

      Whenever you aren't paid in full in cash immediately, you are extending credit. This always involves some risk. The check may not clear; the account may be closed; the debtor may not pay your bill, or may take too long to pay.

      To protect yourself and reduce risks, you need to create a preventive financial policy with guidelines on when to give credit, under what conditions, and whom to give it to.

      It's important to have your own clearly thought-out policy. If you don't, you will tend to make decisions on the spur of the moment, or end up going along with whatever the other person's policy happens to be. With your own policy, you have your own standards. You can still be flexible, varying your policy to cover a number of situations with different people. What’s crucial is having a policy you can adapt to suit your own needs and to understand the trade-offs and risks this policy brings with it.

      Depending on circumstances, you can then use one predetermined credit arrangement or another. And if people question why you're so tough, you can always blame it on your accountant or attorney: My accountant wants us to have everyone fill out this form when we offer credit.

      Without your own established policy, it's easy to let someone control you based on his or her own needs. This often creates serious problems. For example, your customer, client, or friend may try to pay you as little as possible over as long a period as possible. Perhaps you send someone a bill, and he pays you 60 days later, saying, That's the way we normally pay. Perhaps that's true; nevertheless, you wanted your money within 10 days, and you didn't get it. You must establish such matters in advance.

      You'll have more leeway to set your own standards when you deal with individuals and small companies. Big companies are often locked into standard billing cycles and may require several approvals to approve even a small payment. However, you can often cut through this red tape if you are insistent when you initially enter into an agreement to do business with a particular company--and you may even be able to get payments in advance if the people you are doing business with value your product or service enough. For example, I have gotten companies, even U.S. government agencies, that normally require invoices and take 60 to 90 days to pay, to make a payment via credit card or through PayPal for a service I set up that sends out queries for clients to publishers, agents, film producers, venture capitalists, and others because the service requires all payments in advance. If someone uses the service, they have to pay up-front, no exceptions, and so there have been no collection problems at all. We already have the money.

      Some Considerations in Setting Your Policy

      With a solid, established credit policy, you don't have to engage in guesswork when the credit situation arises; you know what to do. In setting up such a policy, you need to determine in advance your answers to questions like these:

      (1) Do I expect all payments to be in cash, money order, or C.O.D., or will I extend credit?

      (2) How large a deposit do I want before doing any work or shipping products? Then, when the job is completed or the product shipped, do I want cash only? Will I accept C.O.D., or will I bill?

      (3) Will I accept checks, and if so, for how much, and what identification or verifications will I need?

      (4) Will I accept credit cards, and if so, which ones? What kind of credit checks will I make to protect myself?

      (5) What contract forms do I need to cover the situations likely to occur in my business? What kind of protective clauses do I want in these contracts to cover me if I am not paid?

      (6) When I bill, what kind of terms will I offer? What discounts, if any, will I give for early payments? What charges for interest or penalties will I add if payments are late? And when will these charges start?

      You additionally must determine when you will start charging for your products and services, and make sure that your customer or client knows your policy. For example, some lawyers and consultants offer their first hour or half-hour of consulting free, so that the client can decide whether he or she wants their services. Others charge immediately--and some want payment in cash or check right after the consultation. Others even ask for full payment before the session starts.

      Any number of credit policies may work for your business. The main idea is to set your policy beforehand, not to create it on the spur of the moment. In this way, you have a clear rationale for your policy, and you will appear decisive when you let your customer or client know what it is.

      Policies may differ widely, because business situations, customers, clients, and products or services differ. You may even want to have different policies to cover different situations.

      For instance, many marketing consultants who work with large companies don't charge at their first meeting with a client. This is because the first hour is essentially a sales pitch that may result in a contract for many hours of work. On the other hand, marketing consultants dealing with small, start-up companies are more likely to charge (perhaps in advance) for an initial meeting. In this case, the customers might need an hour or two of advice to establish direction or resolve marketing problems before tackling remaining issues on their own. You may even have alternate credit policies for different customers, depending on your assessment of the customer's ability and willingness to pay.

      Establishing a more rigorous financial policy may result in losing some customers or clients. On the other hand, it may be to your advantage to lose those people who don't like to sign contracts or make firm commitments. The key question is not just how much you sell or what work you do--but how successfully you can collect what people owe you.

      The Link Between Credit and Sales

      Adjusting the link between credit and sales is also a key consideration in setting your financial policy. Sometimes the two can conflict, since a tough credit policy can discourage sales. A more liberal policy, on the other hand, can often be used as a competitive tool to promote your products or services, and induce people to buy. For example, some speakers who sell books at their lectures have signed on as merchants with MasterCard or Visa; many attendees don't want to pay cash, don't have their checkbooks, or don't want to write a check, but will make a purchase if there is an opportunity to buy on credit.

      Similarly, many suppliers know they'll get more clients and make more sales if they extend credit. For example, a start-up company may choose a printer to print its brochures because the printer doesn't require a deposit up front, agrees to take less down, or gives the company longer to pay. In this case, if the start-up is strapped for cash, the credit the printer extends is a sales incentive to choose that printer over another—even if the actual bid is the same or a little higher. If the new business goes well, the printer's decision may lead to more work from that customer in the future.

      However, for every opportunity there is also a risk. Credit losses for businesses are now about five percent of sales on the average, and in some industries, bad debt levels are even higher. The mortgage melt-down is an example of companies extending much more credit to clients than they should during a rising market; but once the bubble burst, the borrowers quickly ran into trouble; their homes in many cases were now worth less than they paid for them, and defaults and disclosures spread rapidly, causing some lenders to experience major losses and even go bankrupt. Clearly, this problem of extending too much credit is something that must be taken into account in weighing the risks.

      Remember, every loss means you must work that much harder or sell that much more in order to compensate, depending upon your average profit margin. For example, if you've got a margin of 10 percent, for every $100 loss you suffer, you have to sell another $1,000 in products or services to catch up.

      The Risks of Extending Credit

      The risks of extending credit take various forms. For instance, a customer who buys your product or service on MasterCard or Visa can always return the product or dispute the bill, and if successful, the purchase will be charged back to you. Another risk is that the company to whom you extend credit can go belly-up.

      If you're in a company that's big enough to have different people handling credit and sales, realize that the two should ideally be coordinated. For example, your salesperson can casually pick up credit information in the course of making a sale, because he or she already has the customer's good will, and the customer will probably be more receptive to the idea of offering information to the salesperson. When someone else calls for a credit check, the person might get suspicious and defensive.

      On the other hand, salespeople often need a tight leash to make sure they don't offer too much credit to make the sale; all too often, cavalier salespeople deliver customers who simply can't pay. Whatever your situation, you should have a credit policy already worked out--and you should coordinate it with your sales efforts.

      CHAPTER 2:

      Determining the Right Policy for You

      There's no right credit policy for every business. The best credit policy for you depends on your business, your customer, current economic conditions, the size of your bank account or company, how much credit you can afford to risk, and the likelihood you will get paid. In general, establish overall guidelines that are best suited to your current situation, then adapt them according to your assessment of the prospective debtor. We'll start with some basics and look more closely at how to assess your client, customer, or loanee later on in the book.

      Various factors will affect whether to take a harder or more liberal line in each area--most notably, these are:

      • the general economic climate,

      • the area where you do business,

      • the nature of your business,

      • your personal financial strength,

      • the stability of your clientele (though you may vary your policy for different customers),

      • whether you emphasize expanding sales or reducing credit risks.

      Hard Line or Soft Line?

      A hard-nosed approach to credit usually emphasizes these approaches:

      • taking cash or C.O.D. payments only;

      • accepting checks only under limited circumstances (and requiring plenty of ID when you do);

      • avoiding credit cards or checking them carefully;

      • working up binding contracts;

      • asking for large deposits;

      • getting payments in advance.

      This conservative approach may tend to restrict your sales, but you'll have more protection against poor credit risks--and in some situations, this is essential.

      Conversely, with a more liberal policy, you'll do the following:

      • offer plenty of credit to qualified customers;

      • take checks with only minimal ID;

      • accept credit cards with a signature only;

      • use informal contracts if any;

      • do work or ship products based only on a promise to pay.

      This more liberal policy will encourage new customers, but increase your likelihood of encountering payment problems.

      Either approach, or something in between, can work for your business. As circumstances change, your approach can, too; always keep an eye on your current situation or market, and be ready to adjust your policies if necessary.

      General Economic Climate

      When economic conditions are booming, you can afford to be more liberal with credit. You will be in a better financial position to extend it--and the people to whom you lend funds will be in a better position to pay. At the same time, when times are good, customers may be more demanding about expecting credit. If they know that other individuals and businesses are extending credit relatively freely, they will expect you to do so, too. However, the caution here is being alert to when conditions change or there are signs of an economic downturn. For instance, before the faltering economy of 2007, there were signs that the good times were soon going to be coming to an end (such as a stalling housing market, outsourcing to foreign markets and downsizing of employees in the U.S., a continuing war, and growing threats from terrorists). But most people ignored the signs until it became obvious that the economy was taking a nose dive.

      When times do become difficult, extending credit becomes more risky. You may have financial problems yourself and require more cash than usual to keep up with day-to-day expenses. You will face more risks, since individuals and companies may have more difficulty making payments. People are more likely to lose jobs or earn less pay; businesses are apt to have slow periods, and experience cash flow problems.

      Adapt your policies to the times. In times of economic up-turn, be more willing to give credit; when things get tough, get tougher in offering credit – and when you see signs that good times are going to be taking a turn for the worse in the times ahead, tighten your credit reins.

      Where You Live or Do Business

      Where you live or do business is another crucial factor in how likely you are to get paid. In general, the higher the income level of the people who live in your neighborhood or patronize the area, the more comfortable you can feel about extending credit.

      When you go shopping, you probably notice the difference ways credit is used. When you shop in a low income area, for example, all sales will usually be on a cash up front basis; merchants are unlikely to accept credit cards, and only a few will take checks. Some will have signs prominently located by the register: All merchandise must be paid for in cash. NO EXCEPTIONS.

      Some of these establishments even ask for payment in advance. Many self-service gas stations take this approach: you must put in your credit card and authorize payment beforehand. Or if you don’t have a card or it isn’t accepted for some reason, you have to go to the window before you can start pumping gas and either get a credit card authorization from the clerk or pay what you estimate you will use, and then, if there's any change, go back to the window to get it.

      The rationale behind such a no-nonsense policy is clear enough: someone could easily fill up a tank and drive away. Moreover, if the customer fills up and can't pay--how do you take the gas back?

      Given the high risks of doing business in a low-income area, it's no wonder most people want cash. On the other hand, as you move up the economic scale and look into stores in less depressed areas, you will see credit policies become more liberal. Small shops in working-class and lower-middle-class areas commonly don't accept credit cards, since few people in their area have cards and the merchants don't want to be bothered by the extra expense and hassle. But they will take checks with proper identification if drawn on local banks.

      Moving further up the economic ladder, you'll find that stores in middle-income areas typically take credit cards and checks, though to protect themselves they frequently have a policy of running your card through a scanner to get a pre-approval or calling a credit card clearing house or bank before approving the sale.

      Finally, in more expensive and exclusive areas, credit cards become the name of the game. It's more or less expected that customers will pay for most purchases with a charge card, and very little checking is done. Usually, a signature is all that's necessary. The store owner assumes that if you buy the product or service, you have the ability and willingness to pay. Similarly, you'll find that checks much easier to cash in these areas--a quick look at a driver's license may be enough to complete the purchase.

      Business owners may have special problems in dealing with people in wealthy areas. The rich are used to getting the finest products and services, and they can be very demanding, even finicky. Thus, a business catering to the wealthy can have more problems with returns, and more disputes over service, than other businesses. Such problems go with the territory; for better or worse, credit is the way the game is usually played.

      In short, the neighborhood where you do business will affect your risk of extending credit, and you'll find that certain general patterns of doing business have become established in the area. In this case, it's probably best to follow the crowd; an established business that has been around for a while has probably settled on a formula that works.

      Once you're established, you can make your own minor adjustments. On the one hand, you may wish to increase your competitive sales advantage by offering slightly more liberal credit terms. Conversely, you can increase your protection against credit risks if you discover that other people in the neighborhood are frequently getting stuck. (To find out, simply go around, introduce yourself as a newcomer, and ask proprietors about their recommendations and past experience in offering credit.)

      The Nature of Your Business

      The kind of business you are in will also influence your policies. Different businesses attract different types of customers; some are more stable and likely to pay than others. Your past history in dealing with credit questions should be taken into account, too. The size of your average transaction, and whether you expect to do business with the same customer or client more than once, will also come into play.

      Be aware of what other individuals and companies in your field are doing. Suppose you are a small printer. It may be traditional for printers in your area to take 50 percent of the estimated cost of the job as a deposit and expect the rest on delivery. A doctor or lawyer might send a bill; a locksmith who goes out on a job normally gets a full payment with a credit card, check, or sometimes in cash after completing the work. Unless you have a good reason for creating different credit and payment arrangements, it's probably to your benefit to look to others in your industry to set your general approach.

      You might also be guided by the size of your transactions. If your sales are usually for small amounts, it may make more sense to get the full amount in cash, and perhaps selectively accept small checks. (Bear in mind, however, that if low-amount checks bounce, it's usually harder to collect than when a check is big enough to warrant calling the police or going to court.) If you have large sales, you are more likely to accept credit cards or checks (with appropriate credit checks, of course).

      If your business lends itself to continuing client or customer contact, you can extend more credit than if it does not. At gas stations, for instance, though there are some regulars, much business is of the pass-through variety. With the exception of small local gas stations, the motorist stops by on his way to somewhere else; comparatively little business comes from residents of the area. This is why gas stations rarely accept checks. However, a corner drug store a few blocks away, which depends on regular customers, may take checks--and even skip checking IDs for most purchases, because the patrons are usually known to the staff personally – and now some stores, such as supermarkets, can identify previous check payments in their database after one, two, or any set number of purchases – so when you use another check on that same account, you are automatically approved.

      As you continue to do business with the same customers, you can extend more credit. A printer I know starts off with 50 percent down and cash on delivery for everyone. After a few months, he takes small jobs with nothing down and bills on delivery with payment due in 30 days. For bigger jobs, the arrangement is 50 percent down and the rest due 30 days after billing.

      In making credit decisions, keep your antennae attuned for changing conditions, even with a person you have learned to trust. You may have established a great relationship with a client or customer; perhaps you are used to receiving payment within seven days on all purchases when you obtain important new information. Maybe you sense his business is in trouble, or he has recently lost a job. Or perhaps the economy has grown soft. Take these developments into consideration. Perhaps you want to continue your current arrangement to give the person a break and help him get out of a hole. That's fine . . . if the signs point to good times ahead. If they don't, you may be setting yourself up to take a loss. Balance your compassion with an assessment of the cold, hard economic facts. Are you likely to win a continued customer by providing help in someone's time of need? Or does the situation seem terminal whatever you do? If so, you'll still lose your customer--and perhaps your own shirt, too.

      Your Own Financial Strength

      The amount of credit you can extend also depends on how strong you are financially. As you'll notice in looking closely at virtually any industry, the larger the company, the more likely it is to have credit arrangements. The bigger companies are better able to afford extended payments . . . and more likely to promote credit to make sales. In addition, some of the largest companies, like Sears and Macy's, offer their own credit cards!

      These large companies, in turn, can better afford it when a customer defaults or is a slow pay, because they have huge customer bases, and can more easily work the cost of credit into the cost of other sales. If you're small and struggling, you don't have that luxury. A few wrong credit choices can put you under.

      What all this means is that you have to base the credit you extend on your cash flow. If you need your income almost immediately to balance the books and stay afloat, it's probably better not to extend any credit. Just work on a cash-and-carry basis, perhaps permitting C.O.D.'s, checks, and a partial deposit down. As you get stronger, you can think about billing and credit cards, if your type of business and clientele warrant it.

      The Overall Stability of Your Clientele

      The two main factors to consider here are the economic power of your customers and the degree to which you expect repeat business. You can generally expect the profile of your customers to reflect the area where you do business. But that won't always be true.

      For instance, some large businesses locate in a low-income or industrial area because the rents are low, but draw their customers from all over the city. This is the case with large lumber or household supply companies, who get retail customers not just from building contractors, but from customers at many points on the economic spectrum.

      Analyze your customer base separately from the area where you do business; if you need to, start making notes when people come to buy or use your service. Who are these people? Try to establish their demographic profiles: sex; age; economic status; occupation or profession. Once you have learned who your customers are, you can fine-tune your financial policy accordingly.

      For example, if your customers are primarily pre-teens or teenagers, as at some movie theaters or video game arcades, then your arrangements should be strictly cash. By the same token, if your product or service appeals to people who are more likely to be on the move, like an auto repair shop, you will probably want to get cash or a credit card payment up front. (You may, in some cases, have some special options at your disposal—such as, in the auto repair business, a mechanic's lien on the car until you are paid. Even so, you usually want the money, not the car.)

      On the other hand, if you have older customers, as the owner of a beauty parlor does, you know they'll tend to be more responsible about their debts, so checks are probably fine. Likewise, if you are dealing with solid, professional types, you are usually safe in taking checks or sending bills. (Consider the walk-in dentist in a shopping mall, who caters to the low-income customer with a dental emergency, and the dentist in a professional building who usually works with nearby office personnel. The dentist in the mall usually requires payment in advance; the other one is more likely to

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