Ever Hear This? "The check is in the mail"

Gary is the owner of a small company that drills wells. Even though his sales are strong and growing rapidly, Gary doesn’t have the cash to keep his business open. What’s up with that? Is somebody stealing? Actually, yes. Gary’s customers are stealing from him because most of them are not paying his bills on time. As a business owner, Gary has to meet payroll and pay his own suppliers and vendors. He believes in paying all of his bills immediately upon his receipt. Now, Gary is running a large overdraft in his business account, which kicked over into a draw on his line of credit with the bank, maxing out his debt. Payroll is due in 3 days and Gary doesn’t know where he will find the money in time. He has spoken to his banker about it. While Gary may solve the immediate problem, taking on additional debt is not a permanent solution. Gary doesn’t know what to do. He’s stressed out about it and it’s affected his productivity and his family life.

Gary thought that his clients, like most people, treated their obligations like he does. Plus, he (id,type,content_type,pagetitle,longtitle,description,alias,link_attributes,published,pub_date,unpub_date,parent,isfolder,introtext,content,richtext,template,menuindex,searchable,cacheable,createdby,createdon,editedby,editedon,deleted,deletedon,deletedby,publishedon,publishedby,menutitle,donthit,haskeywords,hasmetatags,privateweb,privatemgr,content_dispo,hidemenu) VALUES his relationships with his customers, many of whom are governmental entities or departments. A large portion of his business comes from maintenance projects and Gary is reluctant to upset his customers by coming off as “too pushy.” He explains – “I thought if we did a good job, used quality materials, and charged fair prices, there wouldn’t BE a collection problem. People would do the right thing and not only pay me, but pay me on time. Plus, I really dislike asking to be paid.”

Not a Perfect World

In a perfect world, no reputable business would have collections or accounts receivable problems. Customers and clients would pay their bills on receipt. In the real world, however, collection problems are too common, especially in this economy.

Litigation Should Be a Last Resort

In today’s business world, most confrontational collection methods don’t work. Litigation is very expensive, and many debtors know that creditors won’t sue to collect on relatively small amounts. Collection agencies regularly will charge a business owner 30-40% of the debt as a fee and will send out a few threatening letters, but if the going looks tough and the amount is too small, they’ll look for greener pastures in the form of large accounts and more easily intimidated debtors. What then to do?

The most cost effective solution is to collect it yourself — by adopting a problem-solving stance that is both firm and empathetic. This puts you into partnership and encourages customers towant to pay. There’s a natural resistance that governs bill-paying. But there’s also a way to capitalize on that resistance and turn the customer’s mental inertia into momentum that insures a prompt payment.

A Paradigm Shift

When you perform services or deliver products for your clients and customers, you are entitled to be paid IMMEDIATELY. When you perform the work and send a bill or invoice, giving the customer, say, 30 days to pay, you are extending a courtesy that has become customary today. This courtesy, however, is premised upon the good faith of the party to whom it is extended. It is also not a license to defer payment to you until it is most convenient to the customer. Any customer who owns her own business or works for others for pay understands this. Some customers will use your own virtues against you. They know, perhaps intuitively, that you don’t like asking to be paid, and that you don’t want to put them on the spot and embarrass them.

They will take advantage of this by literally forcing you to do what you believe you should not have to do because they know you will still feel guilty!

The taboo on discussing fees and prices is difficult to understand. It feels uncomfortable at first, but, like anything else, it gets easier with practice.

We’ve found that there are really two possible sources of a change in collections behavior:

• A severe cash flow crisis. Here, you are literally forced to call your delinquent customers. Because you place yourself in a crisis, you make yourself an easy target for negotiated concessions.
• A fundamental paradigm shift. This comes from understanding taking a partnership or problem-solving approach, out of genuine desire to assist the customer in solving a mutual problem. It also comes from understanding that not everyone thinks like you and that there are financial and business predators who don’t spare a moment thinking that YOU have a family to feed, kids in college and a mortgage to pay or that you have to meet payroll and pay your own employees and vendors. It is a disservice to your good customers when you do not manage your accounts receivable. Good customers appreciate the demands of operating a business. They are grateful for conversations you initiate about unpaid accounts and for proactively dealing with difficult issues in a professional manner. Some of your best customers can misunderstand your credit terms, experience seasonal difficulties or become overextended. Plus, if you are out of business and not available to serve them, they will likely suffer inconvenience and disruption because now they need to establish a relationship with a new partner It can also strain your relationship with them when you can’t complete work you’ve agreed to do because you can’t afford to pay your employees and vendors.

Create a Collection System

As the business owner, you must create a collection system for your company that balances getting the money you're owed with maintaining the strong client connection.

Information Triggers

Your financial reporting and management systems should alert you when a customer’s account remains unpaid beyond the date required under the payment terms. This will trigger operation of your collection system. The important thing is to not take it personally when an account is overdue. There could be many reasonable explanations for this. Your customer could be dissatisfied with something, experiencing financial difficulties or a slow down, or have just plain forgot. Your system should help you deal with each situation in a fair and balanced way.

Problem-Solving for Good Customers

When a customer account goes delinquent, you should immediately approach the situation from a problem-solving perspective. Until a customer leads you to believe otherwise, assume that he intends to pay but has a problem and that you are there to find out what it is and respond appropriately. You should develop several options in response to common problems so that the delinquency can be resolved without causing either of you undue hardship. .Your system should involve “hearing” the client’s story, without apology or judgment. Ideally, you should document each contact and your progress in resolving the situation.

Combining Empathy and Firmness

Be empathetic – do your best to understand your client's concerns and problems and demonstrate a willingness to help if you can – and do so with a calmness and firmness that sends the message that what you provide is valuable and that you will put up with no nonsense.

You can avoid waking up one day and finding yourself in Roy's shoes as long as you don't allow collections to be the weak link in your growth plan. When you honestly care about your customers and can communicate directly with the accountable people, you stand an excellent chance of mending the relationship...and getting paid. If you can strike the right balance, you will turn this potentially fatal flaw into a true business advantage.

Listen and Ask Questions

Assume Your Customer Intends to Pay

For all customers for whom you perform services or deliver products, include the phrase in your written or spoken communication regarding delivery or performance – “and of course, as you know, payment is due upon delivery [or at the time services are rendered]

When an account has gone delinquent, include this phrase in your communications - “[Name], we have a bill outstanding from your company which is past due. And of course you know payment on our invoices is due within 30 days. The purpose of my call is to determine when we can expect payment.”

“And of course you know” assumes the customer knows the payment terms. The word “when” assumes that he’ll pay, and the only question is “when?”. To resist this question requires the customer to admit both ignorance and intent not to pay.

Negotiating Price Concessions

When you’ve negotiated a payment reduction, include this language - “[Name], we’ve evaluated your claim and agree that an adjustment on your bill is in order. If you send in your check today for X dollars (most of the amount), we’ll consider the bill paid-in-full. That seems fair, doesn’t it?”

Again, you’re turning the customer’s inertia in your favor. You’ve listened to the complaint and made a fair offer; and your customer doesn’t want to seem unfair.

Deadbeats and Incompetents

While there are times when customers pay late because of cash flow problems (primarily in smaller businesses), invoices are lost (or the customer just plain forgot), misunderstandings concerning payment terms or mistakes in accounts payable processing, in many instances late payments are the result of laziness or poor payment practices. Now, what do you do in the most extreme cases – when payment is way past due, or the check you received is no good? Many businesspersons handle these situations by threat: Pay up or else! The only problem is that intimidation turns your customer into an enemy – an enemy who may well know that you’ll never incur the substantial costs of litigation in order to recover a relatively small debt.

What can you do to turn this situation around? Turn your potential enemy into a friend. First, express sympathy for your customer’s plight. If you’ve been given a bad check, they’re probably already feeling bad about it. Second, let your customer know that you know payment is intended. Third, ask, “How do you suggest we work it out?” This gives your customer a sense of control over events which before had seemed totally out of control. By winning your customer’s sympathy and recognizing his or her basic honesty, you’ve restored their sense of self-esteem. Now you’re in a much better position to collect.

Typically, we recommend that you call your customer and say something like this: “I understand how tight cash is right now; I’m having problems myself. I know you intend to make good on your check, too. How do you suggest we work it out?”

Then, if the customer comes up with no specific plan, I would come up with one myself. “Why don’t we break up the payments over a period of time — say twenty-five percent a week? That seems fair, doesn’t it?” With this approach, I’ve not only avoided the costs of litigation, but I’ve managed to keep a potentially good customer who will remember my consideration and sympathy long after he or she has regained solvency.

Here’s another example: Your customer complains that business revenues have sharply reduced her cash flow. You’re one of several creditors, and there’s no way your customer can pay the full amount of her bill in one check. The only recourse is to work out a payment schedule. You negotiate and arrive at a schedule you know is equitable — and now you want to get your customer’s agreement. What do you say? “That sounds like an amount you could handle, couldn’t you?”

The principle is basic. Use natural inertia to turn your customer’s reluctance into agreement.

The Personal Promise

Another tactic is the personal promise: “Now Mr. Charlson, can I count on you to send the check by October 1st?” Here the commitment is being made to you, the individual, and not a company. It’s even harder to break a personal promise.

When You REALLY Need the Money

There’s another strategy for collecting overdue bills, one that shouldn’t be used except in unusual circumstances. You turn your customer into an ally by dealing from a position of admitted weakness.

The strategy is based on the principle that in many cases coming on strong is the best way not to collect. “If you don’t pay within ten days, I’ll sue you!” may win the response, “So, go ahead and sue.” The same is true of threats to involve collection agencies. On the other hand, an appeal from weakness can recruit an ally. Here, a key phrase is “I really need your help.”

If you’re going to use this approach, be sure you really do need your customer’s help. Otherwise you can lose both respect and credibility. But if your cash flow problems are real and your short- term cash needs are critical, here’s an approach that usually works: “Mrs. O’Brien, I know you’re having problems. I can really appreciate that, because I am too. I’m calling because unless I have your check by 10 a.m. Friday, I’m not sure I can meet my payroll. I really need your help.”

Here you’re asking your customer to become an ally, to help not just you, but your employees. The debt is no longer an abstract quantity, but a real need for real people. You’ve attracted sympathy, and now you stand a good chance of collecting. When appealing for sympathy, harsh or strident tones won’t work. Your voice must be natural, soft, even somber. You have to convey a genuine sense of urgency. And again, get a firm commitment to pay by a specific date. Finish with the phrase, “Thanks, I’m counting on you.”

The No Choice Choice

Another potent collecting strategy is called the “No Choice Choice.” Here again you don’t ask your customer if he or she will do something; rather, you present two choices — both favorable to you — and let the customer choose. For example, “Would it be more convenient for you to pay this in full today, or to spread it out in payments of “X” dollars a week over the next “Y”

weeks?” You’ve mobilized the inertia to move in one of two directions, either of which is perfectly acceptable to you. It’s not really a deceitful tactic, because the alternatives recognize one fact of the situation as a given; your customer does owe you the money. You’re simply giving choices of payment to make the collection as painless as possible for them.

Further Thoughts:

• Don't feel guilty or "pushy." It's your money and they are violating your agreement. 
• Follow up weekly until it is resolved. 
• Your customer would not tolerate the same behavior from her own customers or wait for more than 30 days for a paycheck. Can you imagine a senior vice president waiting 30 days for a paycheck? I think not. 
• No matter what excuses you're offered, remember that you can't use them to feed your family, pay your mortgage or your kids' tuition. 
• Be empathetic, listen and ask questions. 
• Affirm your customer’s basic honesty and intention to pay. 
• Appeal to your customer’s natural desire to maintain the status quo and turning that inertia into payment. 
• Document all payment arrangements other than an immediate wire transfer. You should do this by e-mail or (better yet) by hard copy letter.

There are many variations on the same principles. You make your collections easier by converting your customer’s initial resistance into your own momentum for payment through empathy and the artful use of language.

John Bedosky is an attorney with Minneapolis Bankruptcy Lawyer and works with small to medium sized business to protect their assets, plan for the future and assure the success of the business.

Dan Schleck is the president and founder of Schleck & Associates. He also works with business, banks and individuals to protect their rights and help his clients succeed in business.