Credit & Collections Kit For Dummies Cheat Sheet - dummies
Cheat Sheet

Credit & Collections Kit For Dummies Cheat Sheet

Extending credit and collecting debt can be risky business if you aren’t proactive and following the letter of the law. From getting the necessary customer information on a credit application to spotting suspicious customer behaviors, you need to be ready to go into collections mode when necessary. When that happens, you need to be persistent and firm all while making sure you comply with all applicable state and national consumer protection laws.

Essential Information to Gather in Your Customer Credit Application

When you compose a credit application for your customers, you want to make sure that application includes certain basic information about your customer. Be sure to get the following information from your customer in every credit application:

  • Full legal name and physical address

  • Any trade names or assumed names used

  • Legal entity of applicant (partnership, corporation, LLC, and so on) filed in which state

  • The year the business was formed

  • Home address and Social Security numbers of sole proprietors, general partners, or personal guarantors

  • Amount of credit requested

  • Copies of current financial and operating statements

  • Names of authorized purchasers or contacts

  • Agreement to pay interest and reasonable collection fees on any delinquent balances

  • At least one bank reference

  • Trade references

If your customer won’t share this basic information in a credit application, think twice about extending credit.

Red Flags that Your Customer May Default on Debt

Certain events should trigger an immediate investigation of your customer’s account, and immediate collections action if the account isn’t paid in full.

Be on the lookout for the following red flags and follow up immediately if your customer

  • Has a disconnected phone

  • Has vacated the premises without leaving a forwarding address

  • Avoids telephone contact and fails to return messages

  • Changes ownership, address, or telephone number

  • Drops significantly below the usual volume of orders

  • Displays poor paying habits

  • Breaks promises to pay the account balance or makes excuses for not paying

  • Holds up payment over petty disputes

Making Effective Collection Calls

Most people hate making collection calls almost as much as the person on the other end of the line hates getting them, but calls to collect your debt are an important part of getting money from slow-paying customers.

For best results when making collection calls:

  • Review your customer’s credit file. Before you get on the phone, refresh your memory about the customer, the customer’s purchase and credit history, and anything else that may help you out during your call.

  • Mentally prepare. Anticipate what the debtor may say during your call and what responses you can give. Have a sense, in advance, of what you hope to achieve with the call (for example, immediate payment, half-payment now, half in 30 days, and so on).

  • Have records at your fingertips. Be prepared to use an appropriate document from your file to back up any of your claims about the customer’s account or to refute any of the customer’s claims or excuses for late payment.

  • Talk to the right person. Figure out who in the company can authorize payment on your account, and talk to that person.

  • Be a professional. Maintain a calm, confident demeanor, and listen carefully to what the debtor says. Try to identify and resolve complaints that are legitimate. Don’t let the debtor rattle you or make you lose your temper. Prepare and use a script to keep yourself on track.

  • Take notes. Your notes help you refresh your memory in future dealings with the debtor, and they help you be accurate when you write up faxes, e-mails, or repayment agreements.

  • Get it in writing. Quickly send the debtor a written confirmation of any points of agreement — if possible using fast methods of delivery such as fax or e-mail — and try to get the debtor to acknowledge the communication. If your debtor agrees to pay you, try to get the debtor to sign an agreement spelling out that arrangement.

Making Sure You Comply with Consumer Protection Laws When Collecting Debt

Although debt collection regulations are typically less stringent if you’re collecting your own debts in-house or if you’re collecting business debts, it’s good practice to collect your debts as if every single regulation applies to you. This short list will keep you in compliance with most federal and state consumer protection laws and constitutes a basis for good collection practices.

  • Work through the debtor’s lawyer: If a debtor has an attorney, don’t communicate with the debtor directly unless you have written permission to do so.

  • Respect your debtor’s privacy: Avoid communication about your collection with any third parties other than the debtor’s lawyer.

  • Be professional: Never use any abusive language or threats, and don’t harass a debtor.

  • Be honest: Never make any false or misleading statements to a debtor.

  • Be courteous: Make collection calls between 8 a.m. and 9 p.m.

  • Respect the debtor’s right to dispute your claim: Send the debtor a validation letter within five days of your initial contact.