By Karen E. Klein Collecting on late invoices isn't a task most business owners consider fun. Then again, most business owners aren't Carol Frischer -- author, seminar leader, and collections expert. Frischer, whose book Collections Made Easy, has been translated and published around the world, says millions in bad debt could be collected with a minimum of negativity if business owners followed her advice.
Smart Answers columnist Karen E. Klein recently spoke with Frischer about how small businesses can flex their muscles and make sure they never hear "the check is in the mail" again. Edited excerpts of their conversation follow:
Q: Why do entrepreneurs have such problems getting paid?
A: A lot of companies -- and small companies in particular -- are just not paying attention to their receivables. They're selling product and fulfilling orders and marketing their business, but they have no money invested in an updated collection system.
Q: Why don't customers pay on time?
A: Most people pay eventually, or they couldn't stay in business. But they're struggling with cash flow, so they pick and choose which invoices they're going to pay. Some controllers are paid to stall because it saves their companies money. Small businesses get the brunt of this behavior because controllers only do it when they know they can get away with it.
Q: How does a small company avoid getting into this situation in the first place?
A: I always recommend adding interest charges to late debt. If you don't charge interest, you'll be falling down on the list of who they pay. If you have interest adding up, you can also use it as leverage, as in: "If you pay this bill tomorrow, I'll deduct the interest you owe."
Of course, if you're talking about a longstanding client that always pays right on the dot at 50 days, I wouldn't bug them. They may be a government agency or a very large corporation where cash flow isn't an issue, but processing invoices just takes a long time. But with other customers, especially new ones, you have to be on the telephone the day after the invoice was due. When you call immediately, it shows the client that your bill is very important. If you don't call, you're telling them that they have 90 days to pay.
Q: You make a phone call, rather than sending them a written reminder about a past-due invoice. Why?
A: I used to send letters, but these days, I find that people have so many things competing for their attention, letters aren't as effective as they were. I just pick up the phone, and get the first and last name and as much information as I can about the person I'm talking to. I ask them what the payment process is at their company. I ask what department they're in and what their job title is. I ask what we need to do to expedite the payment of our invoice.
Find out everything you need to know: Who gets the invoice, who needs a photocopy sent directly, where is the check approved, whose signatures have to be on it. Jot down all this specific information because you can use it the next time there's a late invoice.
Q: What about a sales contract and a credit check? Do you tell small companies to get these on file?
A: Always. Remember, if this client didn't sign a written contract, you have no leverage because you can't take them to court without documentation. The sales contract should state when their bill will come due, when service will be cut off if the bill isn't paid, what interest charges will accrue and when. The contract should also state that if you have to go to court to collect the debt, the prevailing party will be entitled to attorney's fees.
Credit checks should be done, particularly with ongoing customers, depending on the amount of the receivable and size of the business. The more information that's requested on the credit application, the less likely you will be stiffed in the end.
Q: Where does a business owner get templates for these documents?
A: These are crucial things I believe you should pay an attorney to draft for you. Having solid documents are worth the money you'll pay for them, because if somebody owes on five invoices, but they have an airtight agreement with you, you're going to get paid first.
The other thing to know here is that people who are out to rip you off will be very well aware of the power of a signed contract, and a lot of them will refuse to sign it. I wouldn't do business with anyone who wouldn't sign, but if you're very anxious for business, at least insist on money up front if someone refuses to sign your sales agreement.
Q: Given how frustrating it is to track down debt, how do you make the process fun?
A: The way to make it fun is to approach the job with the idea that you're going to meet the people you're calling, talk to them, and listen to their stories. I ask whether they got the product and the invoice. I ask if there was anything wrong with the transaction. Once I find out why they haven't made the payment -- and in most cases, if they're honest, it's due to cash flow -- I suggest that they make a partial payment or pay via credit card.
Q: But don't you have to get tough with people who are ducking your calls or offering excuses?
A: You do get tough, but you don't have to get nasty. What you want to do is be very specific about your invoice to the point where it's uncomfortable for them not to pay you. If I hear excuses, I start throwing out suggestions. Can they pay us instead of somebody else? These suggestions make my receivable a priority for them, especially if somebody else accepts their excuse and doesn't call again for another month. Who do they want to deal with less? Probably me. Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues