A little carrot and stick will get debtors paying up on time
The secret to getting your debtors to pay up is to do whatever will work best. Thirty years ago, when I was a young newly-qualified solicitor, a butcher in Ballincollig, Co Cork, asked me to collect lots of small value debts owed to him by customers in the village and the surrounding countryside (it would have been more trouble than it was worth for me).
The first question I asked him was whether or not he wanted to keep the debtors as customers. He asked why. I suggested that he could get a stock of blank postcards and envelopes big enough to contain them and write on the cards in large red marker: "If you don't pay your meat bill of £XX within seven days I am going to instruct a solicitor to sue you."
I told him he should then put a yellow post-it on each postcard saying: "If you don't pay your meat bill of €XX within seven days, I'm going to send a duplicate of this postcard in the open post, and everyone in your neighbourhood will know about this."
Two weeks later, he reported that everyone in the country areas and most of the people in the village had paid up.
That undoubtedly was using the threat of a big stick. Sometimes, however, a carrot is a better option. Smart businesses use a balance of both to get results in their debt collecting.
This kind of training is known as 'Carrot and Stick Training'. Any parent will know all about it. With all kids, this is the approach that really works. A good debt collector knows that this approach also works with customers. So, how does this technique work in debt collecting?
First of course, there is 'the carrot':
* Offer your customers an incentive to pay on time, or to even pay up front (this works the best for continuous accounts as the saving for the customer adds up with time).
* Offer your customer a discount on their accounts if they pay the full account before the due date. Depending on the business you are in, anything between 2pc-5pc is reasonable.
* Offer your customers a fixed amount deduction if they pay the full account before their due date.
* Even better, offer your customers the best percentage discount if they are happy to pay you in advance for your product or services.
* Outdo your competition by offering a little bit higher discount for upfront payments and this way you can get ahead of the competition. It will work for the clients and it will work for you.
* For credit card payments, offer waiving of the merchant fees involved if the full account is paid before the due date. You will be amazed at how many people will jump for it if they are "frequent flyers", and it could be only a minimal discount for you, say between 1-3pc.
* If they do get into trouble then try being nice.
As for using 'the stick':
* Charge interest on late accounts. Legally, you are entitled to. Customers are more likely to pay accounts which incur interest if not paid on time. (Think of your credit card bill).
* Think of all charges you could introduce in your terms and conditions if the account is late for payment.
* Make your payment terms and conditions cover you for all charges incurred (including legal costs)
* Include a clause in your payment terms and conditions that you are going to report the bad debt to the appropriate credit agency.
* It is not enough to tell them that you can charge interest, do it. Start charging interest on the day the bill is late (tell them you have a stick, tell them you can use it, tell them the day on which you could use it, and use it on the day).
* Withdraw credit line the day the account is overdue, and make sure this is explained to the customers before the account is opened.
* Ask the directors of the corporate customer to sign a personal guarantee when the credit account is being opened (you never know when you might need this in the future).
Do a little bit of 'Carrot' and a little bit of 'Stick' approach with your customers and watch how your customers grow initially, to be wary of, and later to be respectful of your business and your payment demands – just like children.
These simple tactics will help you maximise your cash flow and strengthen your relationship with your customers.
Bill Holohan is a solicitor at Holohan Solicitors and regularly advises companies and businesses on commercial matters. Email: firstname.lastname@example.org