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The Pandemic Recession Calls for a Whole New Collections Playbook

Sachin Goyal
Sachin Goyal

The pandemic has led to an escalating debt crisis, with businesses facing mountains of late or unpaid invoices. You need to be tactful in how you collect late customer payments, however.

Back in 2008, a housing crisis and the ensuing financial meltdown led to a recession worse than many businesspeople had ever seen. It took most of the following decade for many of them to recover. But in 2020, the COVID-19 pandemic created a situation that's both worse and more unpredictable.

Wave after wave of mandated shutdowns and operating restrictions have crippled cash flow for businesses in almost every sector. On top of that, the uncertainty over what will come next and when the crisis will end has made planning for the future all but impossible. That bottom-line chaos is having a ripple effect that threatens the survival of even the most previously rock-solid companies.

The reason the current situation is so challenging is that each business or individual facing a cash crunch ends up delaying or missing payments on invoices and debts owed to other businesses, creating an exponential chain reaction of potential losses.

In ordinary times, a business might have one or two outstanding customer invoices in arrears – but now it's facing mountains of them. Since it's clear that simply asking for payment isn't going to work (because customers can't pay money they don't have), cash-strapped companies will have to switch up their collections playbook to survive. Here are some tactics they should consider implementing as soon as possible.

1. Begin with customer outreach.

Right now, businesses have to recognize that things are tough all over. The vast majority of customers who have missed payments haven't done so willfully, but out of necessity. They're managing their cash outflow and sorting their priorities just as your business likely is. For that reason, a significant number of them will respond well to a bit of empathy.

To show it to them, conduct an outreach campaign for customers with outstanding bills. Treat them as you would your best customers when they miss a payment. Make an effort to understand their situation, while still letting them know they're imposing hardship on your business. The most important thing is to be direct but not pushy. Even if it doesn't result in the customer paying what they owe, it at least gets the debt on their radar, which improves the odds that they'll pay as soon as possible.

2. Offer more favorable payment terms.

Although it's not something most businesses want to do, sometimes it's a good idea to offer customers (even ones with overdue invoices) more favorable payment terms to encourage them to pay their bills in a timely fashion. The most popular and effective way is to do away with the ubiquitous net-30 terms that most businesses insist on and instead offer something with an incentive built right in.

One good option is an arrangement of 2/7 Net 14. That means the customer has 14 days to pay the invoice from the date it's issued, but they get a 2% discount if they pay it within seven days. This arrangement works well for two reasons. First, the potential for savings is a powerful inducement for the customer to pay their debt as fast as they can. Second, according to accounting platform provider Xero, giving customers two weeks to pay an invoice leads to the lowest number of overdue days on average.

Depending on the nature of your business, it can also be helpful to attach a late payment fee to any overdue invoices, which is a further incentive for customers to pay what they owe. Combined with a discount for quick payment, this will come off less like a punitive measure and be less likely to prompt backlash from customers.

3. Consider an invoice-backed line of credit.

Under normal circumstances, a well-run business wouldn't have to use debt to finance day-to-day operations. But 2020 has been about as far from normal as it gets. Now is one of the few times when it might make sense for a business to secure an invoice-backed line of credit from their bank. (This assumes that the business has a stellar credit history, clients with a strong track record of paying their bills, and a preexisting relationship with a bank, because finding a willing lender right now is no easy task otherwise.)

Note that an invoice-backed line of credit and invoice factoring aren't the same thing. You should avoid the latter for now, because it would put the responsibility of collection on the factoring company, which might alienate customers at a time when keeping customers (even late-paying ones) is vital to long-term recovery.

4. Use a collections agency as a last resort.

Because the current economic conditions are so dire, it may be tempting to turn over unpaid invoices to a debt collection firm, in an effort to secure a quick cash infusion. In almost every case, this is a bad idea right now. First, there's the fact that a fragmented government response to the pandemic has created a minefield of restrictions on debt collection that vary from state to state. Also, what appears to be a short-term solution can do lasting harm to the business that opts for it.

Many of the outstanding invoices that get sent to collections are probably going unpaid because the customers, through no fault of their own, have no means to pay them. So, sending them to collections will only make their situation worse, and will likely cause the customer to cease doing business with you going forward. You'll then lose out on not only the full payment of the debt, but any future purchases those customers would have made when conditions improve.

In other words, using a collection agency may keep you afloat today and seal your fate tomorrow. Looking at the situation realistically, if your business is that close to the precipice now, there may already be little hope of getting back to where you were before the pandemic.

The bottom line

Finding a way to collect on outstanding invoices and keep cash coming in may be the difference between survival and closure for businesses. Although that's a tremendous pressure, it's critical to remain as patient as possible with your customers. That means taking the time to communicate and empathize with customers, and providing as much flexibility as possible when working out terms with them. This will give you the best chance of getting results and avoiding drastic measures.

After all, we're all in this together. If everyone – businesses and customers alike – looks for a path to the recovery we all want to see, it'll come all the sooner.

Image Credit: AndreyPopov / Getty Images
Sachin Goyal
Sachin Goyal Member
I have been working in the U.S. Accounts Receivable industry (debt collection industry) for the last 20 years. My experience includes working for the largest collection agency in the nation for about 17 years, to serving the smaller collection agencies as well. I have in-depth experience and knowledge in the field of debt collection and personal finance. My clients primarily include small businesses and medical practices who grapple with past-due accounts. My experience revolves around business development, compliance, technology and marketing of debt collection services. In my free time, I like to read financial articles, writing and playing tennis with my kids.