Commercial debt collection trends have changed over the past few years and, currently, there is a shift that is both good and bad for the industry. As the economy still lacks stability, small business firms continue to falter in meeting their debt obligations. This is driving growth in the commercial debt sector as more and more accounts are being turned over to business debt collection agencies. While this is good news for the debt collection industry, the really bad news is that it is becoming increasingly difficult to collect debt from the financially-challenged business organizations. Businesses are looking for debt solutions, yet, they are unable to regain their lost grip on their finances. Debt collection agencies are finding it even more difficult to collect from these accounts than from personal consumer accounts.
Burgeoning Small Business Debt Increases Difficulty In Collecting
According to a survey by the Commercial Collection Agency Association (CCAA), the likelihood of collecting the entire amount on a delinquent business account drops with the length of delinquency. After 3 months, the possibility of collecting drops to 69.5%. After 5 months, this goes down further and after 1 year, the business debt collection agency can collect only 22.8% of the debt that the business actually owes.
Since the Great Recession, there has been a radical evolution in the increasing sources of business financing. In spite of this, businesses are finding it difficult to stay afloat in this tough economic climate. Their debt solvency is affecting more than just their reputation, cash flow and profitability – it is also hampering their sales and marketing efforts. The CCAA example shows that a business with net profits of 2% with $100,000 in debt write-offs would require an additional $5,000,000 in sales to offset that loss of profits.
Show Debt the Door and Reclaim Control of Your Small Business Finances
As a small business owner, it is tempting to think: “Let me finance this last investment / expense and the return will be worth it.” Unfortunately, the reality may be very different: the investment may not pay off as expected or the return might not be enough to cover the amount being paid on interest rates. What makes the entire situation worse for small business folks is that they end up tying their personal and business finances inextricably.
Clawing a way out of the vicious cycle of small business debt is not impossible but it takes lot of discipline and business savvy. There are multiple levers that can be pulled.
First, the basics, but they are so critical that they bear repeating:
1) Say ‘No’ and mean it when you say it: Cutting out and curbing on the unnecessary expenses is an absolute must. You should also free up as much as money as possible to make payments and bills by conducting a rigorous and regular budget review. For instance, although it’s certainly nice to have a cleaning crew clean your premises weekly, picking up a duster and a broom might get you out of debt sooner.
2) Prioritize your payments: Getting out of small business debt is not too different from getting out of personal debt. Target the debt with the highest interest rates first. This is typically the debt that you accrue on your business credit cards.
3) Re-negotiate debt terms and conditions with creditors: You might be able to negotiate a lower interest rate by showing evidence of the hardship that you’re going through and that is barring you from making timely payments. Talking to credit counselors for professional guidance is also a good option.
Next, a few that you may be aware of but reluctant to implement:
4) Reduce your receivables: If your business model allows it, try to get payments upfront with cash, check or credit card. If you sell a service, where payment does not occur till the job is completed, ask for partial payments at specific job milestones.
5) Encourage your best customers to buy more: Review the credit lines and payment histories of the top 20 percent of your customer base. If they have strong financial profiles and solid payment histories, increase those credit lines by 10-30 percent and encourage them to buy more. If done correctly, this will not cause a negative impact to your financials.
6) Run credit checks on new customers: Especially when the amount is above a certain threshold (this will vary based on your industry standards, your business size and your particular risk preferences).
7) Drive an aggressive collection plan of your own: Target your late-payment customers with a proactive collections process that starts at least 5 days before payment is due. Ensure that your credit policy clearly spells out how long you’ll wait for payment and how ongoing / future orders will be impacted beyond that date. Offer a partial payment plan if the customer is having a similar cash flow issue as well.
Once you’ve eliminated your business debts, be obstinate about staying out of it. Create and stick to a realistic budget – seek professional financial expertise for this if you lack confidence. Before you start expanding your business, ensure that it is feasible without going in the red. Not having to worry about debt frees you up to work on other, more productive, aspects of your small business. All the best.
[Note: This post has been a collaboration with Marlon Powell of Debt Consolidation Care.]
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