Constructing an Effective Collections Policy

By Ryan J. Fishman

Collecting from a client who is late on their payments can be a messy task. Many contractors have close relationships with clients, so conducting collections can become an even more uncomfortable position to be in. But this is not an excuse for being loose or haphazard with the collection policy you construct because whether or not you collect on delinquent accounts can be a major determinant of your firm’s cash flow levels. And considering the large sums of cash you deal with in the contracting business, you cannot afford to be lazy in this aspect of your business.

Avoiding Delinquency

It’s easier said than done, but the best collections policy starts with a strong credit policy. Critical to a credit policy are its principal components: establishing standards for eligibility, credit terms, providing clear documentation, and most importantly, collecting[1]. Being careless in constructing a credit policy can lead to unnecessary headaches down the road when you have to chase delinquent accounts from clients you never should have granted credit to. The specific credit standards you adopt may be specific to your firm’s risk appetite, since allowing for substandard credit profiles may lead to more sales, but may also lead to more delinquencies. This is also true for the credit terms you choose, as your firm’s specific need for cash can determine the payment deadlines you set for clients along with discounts you offer for early payment. Providing clear documentation is also crucial to avoiding legal issues down the road.

Collections Phase

Chief to your collection efforts once an account becomes delinquent is maintaining contact with a debtor. Calling the client and asking if their firm’s situation has changed at all, why the payment is late, and when they expect to make the payment can show your understanding of their situation, while also making it clear what your expectations are of them going forward. If the client indicates their plans to make the payment, along with any late fees occurred, they may sign a forbearance plan constructed by your attorney to ensure they stick to their payment schedule. If they lack indication of compliance toward your efforts, then it’s time to consider other options in collections.

Moving to 3^rd Party Collections

If the circumstances indicate that you won’t be able to collect on a delinquent account, it’s best to move swiftly to a 3^rd party collections option. At a certain point, it’s simply not worthwhile to dedicate your valuable time and resources to making the calls and following up with debtors. Nevertheless, you obviously still need to collect on the account, so it’s reasonable to take a careful look at which collections option you seek. Perhaps the two most popular options are collections agencies and collection law firms.

Collection agencies tend to be a popular choice because of their intricate and well-built technological systems that make it easy to send delinquent accounts to them for collection. However, collection agencies have a disappointingly low success rate, anecdotally at or below 5%, along with a history of being quite haphazard in their collection attempts. Examining the tactics used by collection agencies makes it clear why their efforts consistently fall short.

Often times, the sum of an agency’s efforts amount to repeatedly calling the debtor and asking for repayment. If you’ve done this on multiple occasions in the past, it’s hard to see these attempts bearing fruit now, especially considering that the source of the call is a party whom the debtor has no relationship with as they do with you. Another common measure taken by collection agencies is slapping the debt on the debtor’s credit report. But some rather basic thinking leaves the value of this action in doubt. If the debtor is delinquent on an account with you, how many other accounts do you think they’ve also missed payment on? Chances are, you’ll be waiting line with other creditors waiting for payment. The situation requires a more assertive strategy, which is fulfilled by the collection law firm.

From the very first call made to the debtor from a collection attorney, it’s clear to the debtor that you’re serious about collecting. This may better entice the debtor to work on a forbearance plan with the attorney, which may be pursued with your permission and instruction. However, if the attorney isn’t receiving cooperation from the debtor, they can move to file a lawsuit and obtain a judgement in court. From there, they can garnish wages, bank accounts, and tax returns; seize cars; lien property; and compel a debtor's appearance in court to satisfy a judgment.

It’s easy to see how a collection law firm can be far more effective in giving you a higher collection rate, but it also benefits your firm in liability protection. Collection agencies have not exactly been known to be legally and ethically scrupulous with their actions in attempts to collect. They appear with regularity in the local news for poor treatment of those they interact with. This is obviously not just a problem for the agency, but a problem for you as well. The agency is just that—an agent working on your behalf. Illegal actions they take expose you to liability and unethical actions can tarnish your reputation in the public eye. Collection law firms understand the law and work to limit any liability exposure. They even often employ compliance attorneys in office to make sure of this.

Conclusion

There are hardly many easy decisions in business, but what is straightforward is that when you fail to plan, you are ultimately planning to fail. When you layout a clear and concise collection policy, with a potent 3^rd party collector like a collection law firm backing you up when you need it, you are setting yourself up for success. Now is an ideal time to review your firm’s credit and collection policy to determine if they fit the needs of your business, considering the economic turnover our country is experiencing. And when we make our way out of this crisis, you can be confident that your delinquent accounts won’t just all be chalked up to bad debt.

Ryan J. Fishman is the managing partner at Fishman Group, P.C. The firm represents the owners and operators of commercial and industrial properties across the United States. They have succeeded in making the recovery of accounts receivable a profitable endeavor for more than four decades. Today, they use automation technology partnered with the experience of their attorneys and staff to seamlessly integrate with their clients; manage compliance in multiple jurisdictions; and collect for their clients. For more information, visit www.thefishmangroup.com or call 248/353-4600.