Reprinted by permission of The Kaplan Group
Every business owner has experienced the pain of a late or non paying customer. The Commercial Law League of America research shows that as soon as an invoice goes delinquent, the chance of successfully collecting declines by more than 1% per week. If an invoice is 90 days past due, the chance of collecting has already gone down by over 30% to only 69.6% and it continues to drop to 52% once it is six months past due! Clearly, these statistics drive home the point that taking quick action after realizing a problem exists can lead to significantly fewer write offs.
While some problems are easily recognized, such as receiving a check that bounces or being informed by your customer that the company is experiencing cash flow issues, other red flags may not be so obvious. Here are some things to watch for that may indicate payment problems to come:
- The business is moving to a new location
- The company has had recent layoffs
- An employee that has been with the company for a long time is gone
- The company is being sold
- Your customer is waiting for funding or a bank loan
- The owner is experiencing marital problems
- The owner has serious illness within the family
- The customer can’t pay until their customers pay
- The owner is never available to take phone calls or for meetings
- The company sends partial payments, not the full amount due
- The company has broken payment promises
- One of your competitors has called you for a credit reference on your customer
- There has been a change in the quantity ordered (increase or decrease)
- Your customer’s biggest customer declared bankruptcy
- The person who signs checks is unavailable for phone calls
- Your customer does not answer or return your phone calls
- It is taking longer than a month to get your invoices approved for payment
- Your customer does not respond to your emails
- Your customer cannot locate your invoice
- Your customer disputes your invoice for nonsensical reasons
What Problems do these Red Flags Indicate?
Changing locations is costly. A smaller location indicates downsizing. A larger location suggests growth which is a good sign; however, as a company grows, working capital is required. One way to finance expansion is to delay payments to vendors. If the company is under capitalized, this is risky and if growth is not achieved as planned, a cash flow problem can quickly ensue.
When a customer lays off its employees, financial problems are usually the cause. When an employee who has been with the customer for many years is suddenly gone, this may also be a sign of financial distress. It’s possible the employee just moved away. But it’s also possible that the employee saw the writing on the wall and left to find a more reliable place to work, escaping before your customer’s business went belly up.
When you hear that your customer is selling the business, this is a huge red flag. More than likely, the company is struggling financially and selling is the owner’s last ditch effort to try to wring the last profits from the business. As a rule, the selling process is very time intensive and distracting which often causes the business operations to suffer even more. In addition, most deals never come to fruition, and deals that do close are often for far less than the owner had originally expected. The seller oftentimes just disappears after the sale and vendors are unable to collect on their past due invoices.
Similarly, another big red flag is when you hear your customer is waiting for funding or applying for a bank loan. When a business is unable to pay its bills on time, this means it is under capitalized, and its chances of getting a loan or other investment are much less.
Personal issues such as marital problems or serious illness involve significant financial costs that usually take precedence over delinquent invoices. In addition, the business owner may lose focus on the business which can put downward pressure on its profitability.
Other red flags may not be as obvious. Be on the lookout for these explanations or excuses which may be hiding the fact that funds are in short supply: the customer is unable to locate your invoice, says the invoice hasn’t been approved, says the person who signs the checks is out of the office, or makes excuses that don’t hold water. When your customer breaks a payment promise or stops all forms of communication, something is definitely wrong.
When you Identify a Red Flag, Take Immediate Action
Once you have decided that something isn’t right with your customer, get started on getting some answers right away. The best first step is to get on the phone with the customer and learn more. Try to talk to several different people at the business to determine if the story is consistent. Pay a visit to the customer’s location. Talk to former employees. The goal is to find out what is really going on with your customer and determine how serious the problem is.
After performing your due diligence, if you determine the problem is a serious one, you should assume that unless you take aggressive action, you will probably not get paid. This will motivate you to give the account the extra attention it will require to get your money. It is irrelevant that you already provided the goods or service. At this point, your debt collection skills will determine whether or not you will get paid. The more time that passes, the less likely collection will be, so don’t waste precious time procrastinating. The more serious the problem, the sooner you should hire a competent collection agency.
About Dean Kaplan
Dean Kaplan is Principal at The Kaplan Group. Dean’s expertise is widely recognized in the debt collection industry. His advice has been published in a number of industry newsletters such as Credit Today and InsideARM and he is a frequent speaker at industry events.