Credit and Collections: Two Approaches
The size of your company and its resources will help determine your approach to extending credit and collecting accounts. The scenarios that follow illustrate two different approaches to credit and collections.
SCENARIO ONE:
David operates Roadhopper--a local delivery or "courier" service. David employs two other drivers and an office manager. A lot of his customers (mostly local businesses) use his services on a regular basis, but some are one-time customers. Some of these one-time customers are consumers. David requires that one-time customers (and consumers) pay for his services by cash or credit card. Roadhopper's "credit department" consists of David, who usually agrees to bill most business customers - even when he has not done business with them in the past. His office manager sends out bills to his regular business customers once a month. Payment is required within thirty days.
David's office manager sends out payment reminder letters when an account is thirty days, sixty days, and ninety days past due. Each letter is a bit more forceful than the last. If an account is over $500, David calls the customer on the phone when the account is sixty days past due, and asks the customer to promise a date when payment will be made. If payment is not made, David calls the customer again when the account is ninety days old. Because Roadhopper does not investigate the financial condition of its customers or do any up-front approval, it has a higher number of past-due accounts than companies that do investigate and analyze customers prior to extending credit. David figures that it would cost him more money to hire and train additional staff to do that than it costs him in "charged-off" accounts.
When accounts are 120 past due, Roadhopper "writes-off" past due accounts. The office manager continues to try to collect accounts under $100 by sending the customer monthly past due notices.
When they are 120 days past due, all accounts between $100 and $1,000 are turned over to a collection agency. The collection agency keeps 50 percent of the amount it collects on each account and remits the balance to Roadhopper.
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