Myths and Facts About B2B Credit and Collections

The purpose of this essay is to address some of the more common myths about business-to-business credit risk management and debt collection. 

·       Myth: An all-out collection effort will collect almost every delinquent account payable.

·       Reality: The best time to manage risk is before orders are released and preferably before the account is ever opened.

·       Myth: It is both good manners and a good business practice to allow a grace period of several days before calling a customer to ask about the status of a past due balance.

·       Reality: Grace periods are unnecessary. There is nothing inappropriate about calling for payment as soon as possible once an invoice becomes past due.

·       Myth: Credit departments upset the apple cart by asking privately-held companies for financial statements.

·       Reality: Request of this type are received routinely. The most common customer reaction to such a request is to ignore it.

·       Myth: Salespeople have nothing to contribute to the debt collection process.

·       Reality: Salespeople can sometimes bring additional pressure to bear to get a delinquent customer to open a dialogue with the credit department.

·       Myth: Export sales are often more trouble than they are worth.

·       Reality: Foreign sales can be lucrative opportunities for U.S. based companies. However, export sales often present significantly higher risk than domestic sales, and it requires specialized skills and expertise to control this type of credit risk.

·       Myth: A company that is experiencing low bad debt losses or no losses is obviously doing a superior job of credit risk management. 

·       Reality: Even if bad deb losses are relatively low, the creditor company may be experiencing serious collection problems resulting in higher than forecasted DSO and causing the creditor company to experience cash flow problems.

·       Myth: If you use dunning notices, you should not call customers for payment. 

·       Reality: The phone remains the best and most effective way to collect past due.

·       Myth: Deduction management is a great place for new hires in credit and collections to start. 

·       Reality: Managing customer deductions is complicated and requires significant subject matter expertise. Deduction management is probably not a good position for a new member of the collection team.

·       Myth: If calculating 10 customer financial ratios is good, then calculating 110 ratios is better. 

·       Reality: Calculating too many ratios can make the credit decision more difficult. If a ratio does not provide specific insights about the risk of payment delinquency or default by the debtor, it should not be calculated.

·       Myth: Sales and credit are in opposition in a "zero sum game" meaning that if one wins, the other loses.

·       Reality: Sales and credit can work together to increase sales and profits while moderating credit risk.

·       Myth: The larger the balance due, the more experienced the collector should be.

·       Reality: Routine collections can be handled by a less experienced collector. As a result, more experienced collectors can be assigned when situations require their expertise.

·       Myth: It is never a good idea to involve salespeople in negotiating payments with customers.

·       Reality: Salespeople should not be allowed to negotiate payment plans. Sales and credit do not have identical goals – and negotiating a payment is not a task that can/should be delegated.

·       Myth: All collection agencies are created equal.

·       Reality: Collection fees, services offered, and overall effectively varies. For example, some collection agencies only write letters.

·       Myth: Credit managers should not force debtors into involuntary bankruptcy.

·       Reality: Experience credit managers don't limit their options. If the likely recovery would be higher in a bankruptcy, then bankruptcy is a viable option.

·       Myth: Export credit sales are more trouble [and more risk] than they are worth.

·       Reality: For many companies, export sales is an area of great potential.

·       Myth: Credit management is an art, not a science.

·       Reality: It is both art and science, and it is neither. Most of the basic skills can be mastered by almost anyone.