Entrepreneurship: Collecting Debts
Author:
February 2007
Cash is to a new business what blood is to the human body: If it doesn’t keep flowing, things begin to falter. And nothing can block cash flow like customers who don’t pay on time – or at all.
Just ask Lisa Ison, president of The New Century Venture Center in Roanoke, Va. A client scored the promise of a six-figure service contract with a local hotel. The client did a lot of work – but then the hotel canceled its order. And because the client didn’t have a contract with the hotel, the client never got paid.
Although the problem didn’t shut down the business, it very well could have, Ison says. “Most of the time, people go out of business not because they don’t have a good idea, but because they can’t manage their cash flow,” she says.
Many entrepreneurs err right from the start. Ison says lots of her clients begin selling without establishing credit and payment policies and procedures, or sell to friends and family assuming that they’ll pay up. Another common mistake is assuming that everyone will pay when they’re supposed to, says David Sher, CEO of AmSher Receivables Management, a collections firm in Birmingham, Ala.
“When start-ups do their business plans, they often are much too optimistic about debt,” he says. “The money will come, in most cases, but you can’t pay your debts with money that hasn’t come in yet.”
And yet, collecting debts from customers may be the last thing on an entrepreneur’s mind. “When building a business, the business owner tends to concentrate on sales and doesn’t pay attention to who’s paying slowly,” Sher says. “Or the salespeople will be enthusiastic about making the sale but don’t go over the expectations of payment.”
Of course, a company can avoid credit problems by accepting only cash up front or credit cards and not extending its own customer credit at all. That’s not always an option, though. That’s why debt-management education is important.
Sher says debt collection all comes down to one word: ASK. “The thing that’s difficult for most people is to be assertive and speak out” when customers don’t pay on time, Sher says. “[Asking] can be pretty awkward, but the customer is walking around with your money.”
ASK also is Sher’s acronym for the basics of debt collection: attitude, speed and knowledge.
ATTITUDE. A company has to maintain what Sher calls a “collection attitude” – the mindset that places as much emphasis on collecting debts as on making sales. That can be hard for some entrepreneurs (especially in technology and biosciences) whose passion for their product or service may outweigh their devotion to the details of business. That’s no excuse for ignoring debts, though, Sher says.
“When it’s your money, you have to become more of a generalist than you want to be,” he says. “If you can’t [collect debts] yourself, you need to find someone who looks out for that side of the business. The fact of the matter is, if you’re not going to do it and you don’t have someone who will do it, your company will suffer the consequences – [no matter] how good your product is.”
SPEED. It’s vital to act on past-due accounts quickly, because the longer a customer goes without paying, the less likely payment will be made at all. According to the Commercial Law League of America (an organization for collection industry professionals), about 25 percent of accounts that are three months overdue will go unpaid; by six months, it’s up to half; and by 12 months, nearly three-quarters of overdue accounts will never be paid. Clearly, it’s best to deal with overdue accounts right away.
The biggest problems often aren’t deadbeats – nearly all customers really intend to pay – but slow payers. “The biggest complaint I hear is about slow payment,” Sher says. “Slow can kill your business.”
It’s a good idea to know the customer’s accounts payable cycle, Ison says. “When you’re dealing with big companies or government, they pay when they want to pay,” she says. If you know that it’s going to take six weeks to four months to get paid, you can plan accordingly.
You’ll also know when to get moving to collect. “Once a client doesn’t pay, you have to be very quick to call or see the individual and ask for your money,” Sher says. “It doesn’t mean you’re going to get it, but it increases your odds of getting paid. Often a business will stay with a customer much too long and end up with a big debt that could have been mitigated if it had been dealt with early on.”
KNOWLEDGE. Knowing how to collect debts politely, effectively and legally can make all the difference. “People perceive that collecting debts has to be handled in a negative way, but that’s the surest way not to get paid,” Sher says. “It’s all in how you approach things. You don’t want to start off with, ‘I’m going to sue you.’”
While letters are the easiest (and most-used) collection method, Sher says they’re also the least effective. Letters take time to write, mail, receive and read – time you may not have. And letters can be ignored.
A better approach, he says, is to visit the customer in person or pick up the phone. While that seems confrontational, it can be extremely effective, especially if you know the right contact. “Build some kind of relationship with the person who pays the bills,” Sher says. “Don’t wait for them to not pay before you call. If you’re in town, drop by and take them to lunch.” By taking the time beforehand to build a personal relationship with the bill-payer, you’re more likely to get results if you need them later. “If you’re not getting paid, that person will take your calls,” Sher says. “If you don’t have that relationship in advance, though, you’re a pest.”
Unwillingness to press customers to pay their bills is understandable, Sher says. “People don’t like confrontation,” he says. “You don’t know what the response will be. And most of us have had our own cash-flow problems. But you end up being the one who pays in the end.”
This article is one of many being offered throughout the Dayton Region by members of the Entrepreneurial Development Network as part of the Region's celebration of Entrepreneurship Week USA, a national effort sponsored by the Kauffman Foundation. The EDN is a network of regional organizations that provides education, advice and access to programs and events that will help local entrepreneurs launch and grow successful businesses. A complete listing of EDN members, the services they offer, and activities scheduled as part of Entrepreneuship Week, USA, visit www.daytonregion.com and click on the link to "Entrepreneurial Development."
