Once small business owners provide a product or service — it’s time to mail out the bill.
As soon as a bill is past due, the odds of ever collecting on it decrease rapidly. On the due date, there is a 94.9 percent chance of collecting the amount due. By 90 days, it decreases to 69.6 percent, dropping to 39.1 percent after nine months. After two years, merely 9.3 percent are paid.
Not surprisingly, the number of accounts being placed into collection has increased, and fewer are able to be collected.
“There’s no doubt that what happened in the economy has affected debt collection,” said Emil Hartleb, executive director of the Commercial Collection Agency Association of the Commercial Law League of America.
“But particularly, small businesses have not shared in this so-called recovery. There are more accounts coming in overdue — and less collectability,” Hartleb said. This especially affects small businesses. Sales are declining, while simultaneously, customers are not paying their accounts and banks are not lending.
“There is not ready availability of interim credit to assist small businesses,” Hartleb said.
In many cases, small business owners have resorted to increasing the amount of payment plans with their clients.
“But it’s not a good idea to let the matter hang fire,” said Colorado Springs attorney Ken Davidson. “The longer the debt goes unpaid, the tougher it is to convince people to pay.”
Locally and nationally, many business owners are “letting marginal accounts go out to collection agencies or attorneys because they’ve exhausted their ability to collect these debts,” Hartleb said.
Small business owners need to shorten the duration of payment schedules, so they can react much quicker when a payment is missed. Hartleb recommends that creditors keep payment schedules to every week or every other week, rather than 30 or 45 days, which in this economic climate is far too long.
And creditors should ask clients to sign that they owe the amount of the bill and will pay it, or ask for promissory notes to the bank or postdated checks, in order to have additional recourse in case of a default.
But it’s a “Catch-22,” as many creditors — small business owners — have had recent staff reductions, leaving fewer people to do pre-collection work.
“Right now, with the state of the market, the collection industry is suffering just like everyone else,” Davidson said.
Larger companies often have their own in-house collection staff, but many small businesses merely send out a bill. The length of time varies widely among businesses as to when they will turn over a bill to an attorney or third-party collection agency. And it usually depends on their internal resources. A smaller company often doesn’t have enough staff to devote to frequent follow-up on accounts receivable.
Locally, Davidson has noticed that sometimes debtors — even when their own economic situation has not changed, same job, same income, same house payment, etc. — use the economy as an “easy excuse” to say they cannot afford to pay.
After negotiating with clients, “if you’re unable to gain cooperation of your customers (debtors), then you have to think very seriously about turning (their bill) over to a third party collection agency or attorney,” Hartleb said.
Three or four years ago, three of 10 commercial accounts were on a payment schedule or with a collection agency or attorney. Nowadays, that number is closer to six out of 10, he said.
Any bill that is not collected immediately has an increased cost of labor and handling — phone calls, mailings, third party intervention, etc.
“We’re working twice as hard as before to motivate people to pay,” Davidson said.
And that, after all, is what debt collection is all about.
“We try to motivate them to pay (our clients) before they pay their other creditors,” he said.
Davidson’s clients include auto dealerships, credit unions, banks, small business owners, doctors and dentists — no industry is immune from needing to collect from debtors.
“If we can collect a certain percentage of the debt,” Davidson said, “it helps (business owners) improve their bottom line.”
But to avoid needing the services of an attorney or third-party collection agency, small business owners need to be proactive.
“You have to be intimately involved in the follow up with accounts receivable portfolios,” Hartleb said. “This kind of situation is ubiquitous today.”