Your debtor’s threshold is that nebulous, collection-cycle timeframe when your customer actually makes the payment. It may be upon your first call, during execution of judgment, anywhere in between — or never. Do you know the threshold for each of your customers, and is it documented in a file? Of course, there is no concrete answer.

Timing

As we know, most debtors know how to play the game, and so an accurate prediction of when a debtor makes payment is akin to forecasting a volcanic eruption. Throw in an uncertain economic cycle and you may be asking, ‘Should we be placing files sooner?’

It is inevitable then that the topic of timely placement is, and will continue to be, a key discussion topic with your third-party collection partner. The issue is critical because timely placement of a bad debt is, well…everything.

A Valued Partnership

Clearly, one of the primary goals of any credit department is timely recovery of all debts. And the agency can be a valued partner in helping achieve that goal. The creditor does not lose ownership of a file upon third-party placement nor have they failed in their collection efforts if the agency recovers the funds. The agency should be viewed as part of the team, or as the next step in the collection process when the in-house efforts are not successful.

Maximizing Collections: Where Is Your Debtor’s Threshold?by Rick Gabe

“Clearly, one of the primary goals of any credit department is timely recovery of all debts.”

The collection success

rate for accounts

placed six months after

the due-date is less

than 52%.

Department: Accounts Receivable

Your debtor’s threshold is that nebulous, collection-cycle timeframe when your customer actually makes the payment. It may be upon your first call, during execution of judgment, anywhere in between — or never. Do you know the threshold for each of your customers, and is it documented in a file? Of course, there is no concrete answer.

Timing

As we know, most debtors know how to play the game, and so an accurate prediction of when a debtor makes payment is akin to forecasting a volcanic eruption. Throw in an uncertain economic cycle and you may be asking, ‘Should we be placing files sooner?’

It is inevitable then that the topic of timely placement is, and will continue to be, a key discussion topic with your third-party collection partner. The issue is critical because timely placement of a bad debt is, well…everything.

A Valued Partnership

Clearly, one of the primary goals of any credit department is timely recovery of all debts. And the agency can be a valued partner in helping achieve that goal. The creditor does not lose ownership of a file upon third-party placement nor have they failed in their collection efforts if the agency recovers the funds. The agency should be viewed as part of the team, or as the next step in the collection process when the in-house efforts are not successful.

Maximizing Collections: Where Is Your Debtor’s Threshold?by Rick Gabe

“Clearly, one of the primary goals of any credit department is timely recovery of all debts.”

The collection success

rate for accounts

placed six months after

the due-date is less

than 52%.

Department: Accounts Receivable

How is your crystal ball working for you?

Where Is Your Debtor’s Threshold?

On occasion, creditors might actually be a bit dismayed when a third-party collects an account. Here’s a familiar example. The customer states in a dismayed tone, “Wow, you collected ABC debtor? We did all we could with that customer and got nowhere. And now you collected it? I can’t believe it!” This is not an atypical conversation.

How does this happen? The creditor may have reacted in this example without consideration of how the debtor thinks and behaves in a past due situation. The debtor is likely to assume that they have breathing room. They will continue to stall as long as there is communication between their company and the creditor. The debtor may even make small payments to hold the creditor at bay temporarily. In the debtor’s mind, they are ok as long as the account has not been escalated to a third-party for collection.

Other Options

Notwithstanding the issues discussed above, a creditor may have several leverage options with customers who are tardy with their payments. These may vary greatly by industry. These options include:

• Demanding cash on delivery (COD), • Holding orders, • Requiring letters of credit, • Using extended dating terms (typical with

seasonal products).

Regardless of leverage, a creditor must always be mindful of where they are in the collection cycle, or risk losing the account to a write-off.

Back to The Timing Issue

So what constitutes timely placement? An average collection-industry standard of 90-120 days aging is used as the barometer to initiate placement of past due accounts. Past studies have shown that the probability of collecting a delinquent account drops the longer the account is held before placing it for collection.

The collection success rate for accounts placed six months after the due-date is less than 52%. The probability of full collection drops to 39% if the account is not placed for collection until it is nine months past due.

“Past studies have shown that the probability of collecting a delinquent account drops the longer the account is held before placing it for collection.”

Red Flags

To avoid these unattractive odds, here are some sure signs that an account is likely to go seriously past due. When that happens it’s time to escalate the account to the next level in the collection process:

Two or more broken promises of payment,

No customer response for several weeks,

Returned checks without replacement checks,

Customer indicates a dispute not previously raised,

Customer repeatedly requests documentation previously supplied, or

Indications of a closed business, such as returned mail or disconnected phones

In the end, a review of accounts receivable and any decisions on placing delinquent accounts will likely include:

The aspects of your credit policy,

The current financial standing of the customer, and

Any unique facets of the customer relationship, especially one that is long-term.

While we may never have a clear, concise answer as to what is that ultimate threshold, the best insurance against write-off is timely escalation of a past due account. And while you’re at it — just in case — keep that crystal ball handy.

Rick Gabe, National Account Manager for DAL, works with Fortune 1000 companies and has published numerous trade-credit articles to assist credit professionals. Rick can be reached at rick.gabe@dalcollects.com. Since 1971, DAL, Inc., a Certified Agency of CCA of A, has been a trusted name in commercial collections. Find out more about DAL at www.dalcollects.com.

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