Time to send an account to collections? Check this data first

If you’re like most businesses these days, you’re either dealing with a customer or two that’s stretching payment deadlines as far as possible (or are past due), or you’re worried it’s about to become a problem and cut into your cash flow.

Business confidence isn’t quite as low these days as consumer confidence is, but it’s not far off. Companies are focused more than ever on their own profit margins so it’s easy to lose sight of their customers’ financial health.

Say you’re dealing with a customer right now that’s late to pay. Do the normal rules of collections apply in the fragile economy we’re in right now?

We’d lean toward the answer being “Yes.” Customers at the end of the day are just people, and people react to stimuli in every aspect of life. So if you’re like many companies that …

• shy away from cutting off a customer who’s late paying more than once a year
• continue extending credit to clients that are late, or
• don’t renegotiate terms immediately with a slow-payer

… then you could be setting yourself up for more headaches than your competitors.

Don’t wait too long to get C&C involved

What if your Accounts Receivable team is struggling to secure an outstanding debt.

A few golden rules apply. If it’s a new customer, your A/R team should be reaching out to obtain payment. If a new customer doesn’t respond promptly to a request, that’s a red flag the customer doesn’t intend to pay.

In those situations, sending the customer to Credit & Collections the sooner the better can help resolve the situation in your favor.

For existing customers, the potential collectability of an outstanding debt from a commercial account varies depending on how late it is (data collected by the Commercial Collection Agencies of America):

• You have a nearly 90% chance of repayment if an account is one month late.
• That rate drops to just under 70% once the debt hits the three-month mark.
• At six months, your odds of getting paid drop to 50/50 (collectability is 51%).
• And you’re at about 20% at the one-year mark.

These figures can help you determine your chances of getting reimbursed on a per-client basis. Other factors you’ll no doubt consider are the amount of the debt, the value of the customer to your business and any info about the customer you’re privy to, such as an impending bankruptcy.

Bottom line: Waiting too long to call in a collections agency can cost you. Once an account is nearing three months past due, it may be in your best interests to send the account to collections.