Credit and Collections: Two Approaches

The size of your company and its resources will help determine your approach to extending credit and collecting accounts. Deciding which option is best for your company is a personal decision. The following scenarios illustrate two different approaches to credit and collections.

Scenario One: The Small Business

David operates Roadhopper--a local delivery or "courier" service. David employs two other drivers and an office manager. A lot of his customers (mostly local businesses) use his services on a regular basis, but some are one-time customers. Some of these one-time customers are consumers.

Credit Department

David requires that one-time customers (and consumers) pay for his services by cash or credit card. Roadhopper's "credit department" consists of David, who usually agrees to bill most business customers - even when he has not done business with them in the past. His office manager sends out bills to his regular business customers once a month. Payment is required within thirty days.

Past Due Accounts

David's office manager sends out payment reminder letters when an account is thirty days, sixty days, and ninety days past due. Each letter is a bit more forceful than the last. If an account is over $500, David calls the customer on the phone when the account is sixty days past due, and asks the customer to promise a date when payment will be made.

If payment is not made, David calls the customer again when the account is ninety days old. Because Roadhopper does not investigate the financial condition of its customers or do any up-front approval, it has a higher number of past-due accounts than companies that do investigate and analyze customers prior to extending credit. David figures that it would cost him more money to hire and train additional staff to do that than it costs him in "charged-off" accounts.

When accounts are 120 past due, Roadhopper "writes-off" past due accounts. The office manager continues to try to collect accounts under $100 by sending the customer monthly past due notices.

When they are 120 days past due, all accounts between $100 and $1,000 are turned over to a collection agency. The collection agency keeps 50 percent of the amount it collects on each account and remits the balance to Roadhopper.

When they are 120 days past due, David files suit in small claims (conciliation) court for all accounts that are over $1,000 but under $5,000. When he filed his first two or three cases, David paid his attorney on an hourly basis for advice on how to prepare for and handle the case. David now feels comfortable with handling small claims cases himself. He has been successful in getting judgments from several deadbeat customers.

David turns over all accounts that are 120 days past due and have balances of more than $5,000 to his attorney. David's attorney takes the cases on a "contingent fee" basis, which means that the attorney keeps a certain percentage (35%) of the amount he or she collects as a fee.

Scenario Two: Larger Business

Morton Co. is a wholesaler of plumbing products. Morton has thousands of customers. Morton Co. is large enough that it has its own credit and collections departments.

Credit Department

The credit department is responsible for deciding which of its customers will receive credit terms, and which of its customers must pay in cash. The credit department requires that each customer requesting credit terms complete a credit application and provide company financial statements and credit references. A decision whether to grant or deny credit to a customer is based on specific criteria in Morton Co.'s written credit policy.

Past Due Accounts

The collection department is responsible for collecting past due accounts. Past due notices are sent on a periodic basis to all accounts. Telephone calls are made on a regular basis to accounts over $1,000. Morton writes off all accounts that are over 120 days past due.

When they are 120 days past due, Morton sells accounts with balances over $1,000 but under $20,000 to a collection agency. The collection agency pays Morton fifty cents on the dollar for the accounts.

When accounts over $20,000 are 120 days past due, Morton pays its attorney on an hourly basis to collect them. Sometimes, its attorney collects the account simply by writing a demand letter. Other times, its attorney must go through the process of commencing a lawsuit and obtaining a judgment against the customer. Morton's attorney also help's Morton collect on any judgments obtained.

Next Steps: Meet with a Lawyer

Whether you are in charge of a small or large business, debt collection is a difficult subject. There are numerous laws you have to comply with regarding collection agencies and more. Meet with a business and commercial law attorney today to go over your options.

For more information, see FindLaw's Business Finances section.