Avoid Sharing The Road With These 3 Types of Debtors
In business it’s common to experience a situation where you are “owed money”. Throughout the long road of starting a business, entrepreneurs work relentlessly to ensure quality products/services, seek and train highly motivated sales representatives, provide excellent customer service, and even extend credit terms. However, as the business begins to pick up momentum, debtors can cause major accidents on the road. As your business is driven with prestige, backed by discipline, organization, positive cash flow, and strong leadership, it is inevitable you will unexpectedly find yourself near at least one of these three classes of debtors.
Mr. Broke In The Beater
The beater is a car on its last legs. Old, rusty, dented, holes in the paint, missing hubcaps and all. The beater car represents Mr. Broke perfectly, a debtor just barely putting along. He is simply not sitting in a positive cash position. These debtors have no money to pay and are often the most difficult to collect from. There are endless reasons why this customer can arrive to this outcome. Mr. Broke wants to pay and would if he could, he however does not have the funds to do so.
As you share the road, you need to be cautious of these debtors. Without proper diligence, credit checks, personal guarantees, an accident with Mr. Broke can cause your business a substantial amount of time and lost revenue. Although Mr. Broke may be a nice guy and beg for a chance to be granted credit terms, it is your responsibility to investigate Mr. Broke’s financial situation. When you see one of these beaters in your rearview, drop a gear and speed away. You should never do business with a Mr. Broke in the beater when you’ve identified him as such. When a debtor has no money, collections become nearly impossible and the risk of Mr. Broke going out of business is high. If it does, you've lost the credit you've extended.
Dr. Deadbeat In The Dirty Lexus
Dr. Deadbeat is a tricky debtor to spot. From first impression, Doctor Deadbeat seems to be an intelligent, well-kept individual. On the road, Doc drives a luxury vehicle and seems composed. However as you start “sharing the road” with Dr. Deadbeat, you begin to recognize minor obscurities. Up close the car is dirty and has not been washed in some time. The inside of the car is a mess, trash is everywhere. There is a little dent in the rear bumper from when Dr. Deadbeat “loved-tapped” a car as he was backing out from a space. You also notice on the dash parking violations and speeding tickets.
These liabilities begin to add up and put Doctor Deadbeat in a tough situation. This debtor can’t help but get himself into trouble, which puts their creditors at risk. Skip-tracing and diligence for debtors such as Doctor Deadbeat requires attention to detail and significant expertise. Although a “Doctor” may appear trustworthy from the onset, you must meticulously review this particular business’s financials, owners, vendors references, etc. Because Doctor Deadbeat can still drive the “Lexus”, he may maintain assets and still strive to operate and grow their business. This means a chance at collecting the debt remains possible. In most cases of “Dr. Deadbeat in the Lexus”, collection will usually require a negotiated payment plan and may take many months to recoup your lost receivables.
Ms. Scatterbrain in the Vinyl Wrapped Van
We have all witnessed a Ms. Scatterbrain. You definitely know the type. On the phone, doing her makeup, trying to eat a sandwich, while of course still trying to drive the car wrapped in her business’s branding! Ms. Scatterbrain is loud, proud of her business, and can not help but multi-task.
You cannot blame her, she has A LOT on her plate. She oversees multiple facets of her business. While managing her sales team, she is also keeping an eye on quality control, production, par levels, marketing outputs and keeping the books. She is a woman to admire, however, when entering into a credit relationship with her, you must remain aware of her downfalls.
Ms. Scatterbrain struggles with her organization and maintaining follow through on her proper priority list. Ms. Scatterbrain can be one of your larger accounts and you do your best to keep her happy. However, after releasing credit terms and delivering products, it becomes challenging to gain her attention when the time comes for her to pay the invoice.
In order to prevent friction with this type of debtor, ensure all expectations are outlined from the beginning. Include an interest expense on your invoices and detail the consequences for consistent late payments. With this type of debtor, it is often useful to have her initial an interest clause to confirm she is aware of possible additional charges. Ms. Scatterbrain hates having to pay for extra unnecessary expenses and holding her to an interest clause should help keep her on track.
Although Ms. Scatterbrain may be frustrating, she always comes through with payment. These debtors like to be managed and nudged to pay bills. It may take dozens of phone calls a week and twice as many emails, but with the right strategy, Ms. Scatterbrain will find the time to write that check.
All in all, when releasing credit terms to your customers you need to buckle up and fasten your seat belt. Although you may be a safe “driver” heading to your ideal destination, you can never be certain what roadblocks and accidents you will experience on your way! However, if your business can take proper steps to ensure tight credit policies and procedures, strong credit agreements, and outsource aged receivables to a third party, there should be nothing but open road ahead.