More SMEs Are Using Collection Agencies

Which is no surprise, I suppose. It is, though, disappointing to me personally that SME’s are not trying harder to negotiate and resolve problems without recourse to third parties.

Debt Collection Agencies obviously have a purpose – they wouldn’t exist if they did not. Obviously, too, there has to be an end to the line somewhere when it comes to truly recalcitrant non-paying customers. However, dividing the recalcitrant from the willing but temporarily unable is the task of the supplier – you, actually! - and it’s very important indeed both to you and to your business that you differentiate between the truly recalcitrant and the willing but temporarily unable to pay before you employ a collection agency.

‘Spray-hitting’ – sending all overdue accounts out for collection by a Debt Collection Agency – can look like a great option when your cash flow situation is so wretched that you have to worry about where the next wage bill is going to come from - but it’s still a very, very, bad idea indeed.

I remarked many months ago that successful debt collection has never been about aggressive or confrontational behaviour. Unfortunately, debt collection agencies can be both aggressive and confrontational – and very destructive of commercial relationships.

One or two poorly managed or overly aggressive telephone calls from ‘stranger’ agency personnel can destroy all the work you have put in to building a good relationship with a customer - and send the possibility of friendly negotiation (and future trading!) straight out of the window.

And - as I have said before - times will get better, and people have long memories.

You may indeed think at the moment that you ‘need’ to employ a collection agency to solve your problems, but I believe that you need to consider all your options very carefully before you do that - and I have, after all, been in the business of collecting other people's money for more than fifty years now.

The fact is that circumstances alter cases - and at the moment the circumstances are not just unusual but unprecedented. We all have to adjust to that.

I’ll be talking about choosing and using agencies tomorrow. In the meantime, though, if you’re thinking of going down the agency route, you might want to spend some time dividing the sheep from the wolves on your ledger.

How Do You Look to Lenders & Suppliers?

If you get a copy of your personal and business credit reports from a credit reference agency, you will be able to see how you look to lenders, suppliers and, of course, prospective or established customers.

It's vital to focus on maintaining a good credit rating, to understand the different criteria that are used to construct a good credit rating , and also to be aware of what you need to do to improve your credit rating.

In an earlier post I mentioned that Commercial credit agency Graydon UK and business data specialist Validis were launching a new credit information service for SME's this summer. The new service allows SME's to exercise greater control over the information provided by credit reference agencies to prospective creditors, and will improve their access to finance and credit insurance cover. Information provided to prospective creditors/commercial lenders under the new service will be based on reliable, detailed up-to-date financial data including validated monthly management accounts. You might want to think about using the service.

In the meantime, please remember to monitor your registered company information regularly. Companies House is legally bound to accept any information sent to it at face value - which means that it's easy to change Company documentation. Corporate ID fraud is here to stay for a while. Don't become a victim. Cutting back on basic processes, disciplines and checks that would normally be part of your normal business activity is false economy.

Managing Risk - Information is Power

Avoiding bad debt or fraud increasingly means knowing your customers and the people behind the businesses, and gathering, collating and monitoring information about prospective and established customers alike.

Data can be collected from various sources - new account opening forms, credit reference and government agencies, sales and marketing personnel, customer contact centres, draft accounts, forecasts and Credit Circles – and the information gathering process should be ongoing, so that the picture of a customer’s financial stability is always up to date.

Obviously, checking the financial status of any prospective customer – however large or however well you know the individual or business involved – with a credit reference agency before trading commences is mandatory, but all of the data that can possibly be gathered from or about prospective and existing customers alike from all available sources needs to be carefully checked and verified regularly.

• A search of Companies House records for information on Limited Companies is something that most people do as a matter of course at the start of any new commercial relationship - but few monitor their customers regularly afterwards.

• Many people never bother to check electoral rolls for information about sole traders or the owners of non-limited businesses at the start of any commercial relationship - or even think to check the roll when things begin to go wrong.

• Whilst some people check The Register of Judgments, Orders and Fines, The Individual Insolvency Register and one of the many available debtor registers before deciding to issue proceedings against defaulting debtors, few make it part of their initial or ongoing information gathering process.

Making these checks initially and on an ongoing basis makes it easier to avoid fraud and respond to changes affecting customers’ status appropriately - to change collection strategies, revise terms of payment, or (worse case scenario) close the account.