No matter how many times I listen to the song “Chasing Pavements” by the songstress Adele, I swear it says, “Should I give up or should I just keep chasing payments, even if it leads nowhere?” She’s really saying “pavements,” but listen to the song here and tell me that “payments” is not what you hear? Or maybe it’s just those of us who think about chasing payments a little too much.
Either way, every time I hear the songs it leaves me with a question: when should someone give up on chasing payments? An odd inspiration, I know, but it’s a great question, left greatly unanswered. The worst part is that no generic answer can be given on when you should give up on chasing payments, as every situation is unique. However, there are certainly some industry best practices you can consider, depending on how long you have been chasing that payment. See where your late payments fall below.
1 – 30 days past due
When you have an invoice that is under 30 days past due, it’s time to start taking immediate action. Send your customer a payment reminder letter ASAP and follow that up with a phone call. Try to keep your language friendly, as many times this age of invoice is due to customers simply forgetting their payment date or accidentally pushing the invoice to the side. Give them at least one chance. However, enforce your deadlines by including a late fee. As soon as an invoice becomes past due, you need to add the fee. Then in the payment reminders you make to customers during this time, let them know of the added late fee. In some situations, you may be able to waive the late fee to get them to pay immediately. However, if you are going to add a late fee, be sure to include that in your contract with the customer upfront.
30 – 60 days past due
Once an invoice becomes older than 30 days, you need to up the anty. Continue with the reminder letters, but be sure to alter the language you use to be more serious. If you need an example, you can compare our Friendly and Serious Reminder Letters with our Severe and Final Letters. See what a difference language can make? If you are able to get the customer on the phone, let them know you’ll be in the area this week (considering they are local) and you’ll drop by to pick up the check. This puts them on the spot, and lets them possibly confess to the real reason why they haven’t paid. This is your last opportunity to collect on your invoice before getting outside help.
60 – 90 days past due
When an invoice becomes 60 days past due, it’s time to look at getting some help. Hearing from another source really can motivate customers. There are two options you can choose from: getting a collections lawyer to draft a letter or getting a third party service to do so. Third party services tend to be more cost-efficient than lawyers and simply having the name of another company on the letter speaks a lot to customers. It shows you are taking serious action on their account. If the invoice is large enough, a lawyer could be excellent option. Not only will they use language that is strong and proven effective, but the legal presence is a great way to entice action from your customers.
90 – 120 days past due
Once an invoice becomes 90 days past due, it’s time to consider no longer doing business with this customer and looking at other ways to get your money. One option is to take your customer to small claims court. However, this is only an option for some, as there are monetary limits (it is small claims court, after all). You will need to consider any legal fees you will incur and also evaluate your own time. How much is an hour of your time worth? Add up the hours you’ll lose in court and put a dollar value to that lost time. Your other option in this situation is to send this account to a collection agency. Working with a collection agency can be daunting for some, but there are many collection agencies out there who have amazing recovery rates and are known for treating their clients’ customers with the utmost respect. The key is doing your due diligence when finding an agency. Be prepared, when you send an account to collections, you will have pay, but only if the agency is successful in collecting. Their fees can be hefty (upwards of 30% of the collected amount) so only choose this option if you know its the difference between you seeing some money vs. none at all.
120 days past due
If you chose not to pursue any of the avenues above, or if you have and have yet to see your money, it might be time to “give up”. Obviously, this situation is unique to everyone. If you still feel there is hope, keep chasing. However, if you feel the debt is not collectable, then you should write it off. Writing off bad debt should always be the last resort. Keep in mind, with your receivables, you are required to use the direct write-off method. But, when I say writing off debt should be the last resort (although sometimes an easier course), I mean it. It is extremely difficult to compensate for bad debt. Just how difficult?
If you had $18,000 dollars in write-offs last year, and a 4% profit margin, you would need $450,000 in additional sales to compensate for these.
Yikes! If you would like to see how many additional sales you would need to make to compensate for you write-offs, you can do so with this write-offs monitor.
The true goal is to work so hard at chasing payments that you never have to get to a point where you give up. Follow this timeline as it best fits your business, explore every option you have to help chase that payment, and only until you realize the debt is not collectable should you give up.
This article was originally published on Funding Gates. Funding Gates is the world’s first CRM platform for receivables management. Serving as an online credit department for small businesses, Funding Gates is set on making managing receivables the easiest part of running a business.