1. Identify your defaulters.
Profile debtors: distracted, impecunious, cheapskates, liars... you name it! This classification will enable you to adapt your dunning strategy to the debtor and his situation.
One way to keep track of even potential bad payers is to establish a ranking (or scoring) of your customers. This involves classifying them according to risk categories based on well-defined criteria: type of business, legal form of company, capital, payment habits, etc. A score ranging from 1 to 5 (from very risky to not at all risky) can help you in your customer watch.
If you need to take legal action, copies of letters sent to the debtor will provide proof that amicable means of redress have been exhausted.
2. Prepare a reminder schedule
You need to follow a crescendo process. Alternate written and telephone reminders: A few days before the due date, call the customer. This pre-emptive telephone reminder is very effective against the «clever» ones who always try to postpone payment. Use a «compliance check» as an excuse. If you pay attention to the person you're talking to, you'll know before the due date whether you're going to be paid or late.
- About two or three days after the due date, send a first reminder letter. This demand for payment must be skilfully drafted so as not to jeopardize the business relationship.
- One week after the due date, if you haven't heard from your customer, give him a call. This follow-up call should be courteous and constructive.
Don't hang up without determining the reasons for late payment and obtaining a commitment from the debtor. One director of a Groupe de crédit manager says that »with large customers, we spend hours on the phone.»
- Ten days after the due date and still nothing? Send a second written reminder. This letter, though forceful, shouldn't be aggressive. Be firm but courteous. Mention the first reminder and indicate that this is the «last reminder».
- Two weeks after the due date, i.e. eight days after your first reminder, if your customer does not pay, send him a letter of formal notice with a one-week deadline. Don't forget to include the late payment penalties and the various clauses in your general terms and conditions of sale. Also specify that the file will then be forwarded to a bailiff, lawyer or debt collection agency, and that the costs of the procedure will be added to the debt. The formal notice is the necessary starting point for any legal action. You'll be damaging your relationship with your customer.
If your computer system allows, automate reminders by defining periods (e.g. X days after the due date) after which standard letters are automatically issued, so as not to forget certain defaulters.
3. Don't be intransigent
Your customer can't pay his bill and is proposing to pay in instalments? Accept his request for payment in instalments: in fact, so would a judge. Propose a new payment schedule on condition that he pays part of the debt immediately. Put everything in writing and get your customer to sign your agreement. He can no longer withdraw. First of all, get the VAT reimbursed separately. This way, the customer recognizes the amount of the invoice itself.
4. Make disguised courtesy visits to your customer's premises
A completely different method is physical confrontation. You storm into your debtor's home and lay siege to his business. «I go to my customer's house in person and don't leave until he's given me a cheque,» says a communications agency director. Some creditors go so far as to help themselves on the spot, raiding furniture or collecting merchandise.
5. Call in a collection agency.
Have you exhausted all your personal resources? You need a collection agency. The system is efficient. On the other hand, it comes at a cost that needs to be negotiated and assessed in relation to the sales to be collected. Debt collection, whether amicable or judicial, requires skills and a real network. But for the firm to be effective, you need to build up a solid and complete case file. When you turn to a collection company, you need to give them a deadline for recovering your debt. Pay them by the success fee, with a percentage on cash receipts.
6. Contact your lawyer
This experience is quite exceptional. As a general rule, it is advisable to use the common law procedure only as a last resort. Firstly, because it is costly for the company, and secondly, because the trial can last one or two years.
7. To avoid this: adopt a selective customer policy
Finally, to prevent this from happening, lock in the procedure upstream. Set up a rigorous customer selection procedure. For example, draw up a customer file with all the information required for identification (trade register, articles of association and addresses of directors and shareholders, tax identification number, directors' contact details, bank accounts, etc.) and, if possible, demand a guarantee if you are not confident.
Set up a credit limit system that prevents delivery if the initial credit limit is exceeded. Some integrated software packages enable efficient credit management, with a system that blocks orders if the credit limit is exceeded.
This is where the battle begins with sales people who have sales targets.
