Bad debts are worth collecting

Nation's Business, May, 1989 by Charles A. Jaffe

Bad Debts Are Worth Collecting

On the night in 1981 when American Energetics Inc. completed its first sale, company founder Marshall Craig did what most new business owners do: He celebrated.

"It was a c.o.d. shipment made to a guy just north of here," says Craig, whose St. Petersburg, Fla., company sells solar film used to tint, insulate, and protect glass. "We were so happy to get that $137 check that we went out and had a party. What a great feeling."

Until the check bounced.

"Our first sale, and we never collected it," Craig says wistfully. "We tried, but never did. We were rookies hungry for business, and we didn't think about what could go wrong. That was our starting point. Things have changed a lot since then."

Today, Craig's firm, a $2.5-million company with 12 employees, requires cash on its first sale to a new customer. Thereafter, a completed credit application and a credit check determine whether a buyer can run a tab. The measures are necessary, Craig says, because, like many companies, American Energetics has customers across the country who are little-known and seldom seen by anyone in the home office.

"We've tightened up on the information we ask for up front, and if someone goes bad, we're a lot faster in going after them," Craig says. "I give it about three phone calls before I go to a collection agency. If we don't act quickly, chances are that we won't get our money. As a result, we have a lot fewer bad accounts than we did a few years ago."

At a time when combined corporate and consumer debt in the U.S. exceeds $2.4 trillion, businesses are facing on alarmingly high number of "skips," or accounts that are delinquent because the customer has "vanished." Coping with credit problems, according to industry experts, requires that a company--as Craig's did--take measures to protect itself.

The collection industry's experts estimate that bad debts range from 3 to 5 percent of consumer accounts and 2 to 4 percent of commercial accounts. Good collection procedures, by most estimates, can reduce unpaid debts to 2 to 3 percent on consumer accounts and to 1 percent or less on the commercial side.

The American Collectors Association, a Minneapolis trade group representing 3,500 independent collection agencies, estimates that in 1986, the most recent year for which it has figures, delinquent accounts worth roughly $20 billion were turned over to recovery agents. "And there's probably another $20 billion that businesses don't even attempt to place with an agency or collect on," says the ACA's administrative vice president, David Peterson. "A lot of that debt could be recovered but isn't."

Business owners and credit managers often are ill-equipped to pursue skips or even to provide a professional collection company with enough information to have a reasonable chance of recovering the debt, according to collection specialists. They add that owners often are not even aware of the severity of the skip problems affecting their companies. When business is good, it's easy to overlook a few missed payments. Some entrepreneurs even help carry delinquent debtors along in the belief that the customer eventually will turn business around, or they may simply take a write-off without giving chase because they figure that bad debts are part of doing business.

Bad debt translates quickly to the bottom line; a company's sales and work force can grow while its profits shrink because an increasing number of customers have accounts that are 90 days or more past due.

Paul J. Schoff, who specializes in debtor-creditor matters for the Allentown, Pa., law firm of Margolis Smith Baker & Schoff, says: "Nobody likes pursuing bad accounts, and, as a result, problem accounts are often overlooked. What makes that sad is that it's easy to establish a system that makes collections less frustrating and increases the chances of finding a customer who disappears."

Changing credit procedures to improve the chances of recovering bad debts usually requires little more than common sense.

The first place to look for the customer who skipped--and the first procedure within your own company to examine for effectiveness--is the credit application. It is a lasting link between customer and company, and it should be complete and informative.

Too often, collection specialists say, the credit form is given cursory attention. In many instances, the sales staff is responsible for having customers complete the application, but the chore is permitted to lapse in an effort to lock up the sale quickly. In addition, many companies don't like to be too aggressive in asking for credit information, fearing that their credit procedures may scare a customer off.

"If a guy doesn't like your credit application or says that you're paranoid and that he isn't going to fill it out, that should be a high sign that you might want to think carefully about extending him credit anyway," says Les Kirschbaum, president of Mid-continent Agencies Inc., a Chicago-based commercial collection agency with several offices around the country.