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The Check is in the Mail

Posted by attorney Daniel Schleck

TheCheck is in the Mail

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

Like many small business owners, Joe thought that most people treated their obligations like he does. Plus, he 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 Joe 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.

The best 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 to want 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.

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.

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. Olson, 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.

Dan Schleck is an attorney with Mansfield, Tanick & Cohen and practices in the areas of business, creditor rights and bankruptcy.

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