Effective credit & collection paradigms

Last week, I was talking to a local businessman who revealed that he has problems with his credit and collection department. It seems that he has several turnovers in the department and to make matters worse, increasing collection problems. Well, I told him this is not really extraordinary, in today’s fast paced economic condition, manpower turnovers and delinquencies are really a day-to-day challenge to most business entities. However, the key here is how to control and maintain an acceptable level of losses and/or delinquencies. The best way or strategy on how to deal with this is to institutionalize some basic Credit & Collection principles that can be applied to the business and implemented by all stakeholders of the company.

In my over 15 years of reviewing company’s credit and collection policies/ procedures, I always see some patterns and lapses in their policies. One of the most critical lapses is the thinking that credit granting and/or collecting is the “job” of a particular person or department. Meaning, the sales or marketing group sells while the credit / collection group collects.

For me, unless this mindset is improved, no matter what a company does turnover in the department and delinquency in accounts receivables will always be a common problem for the said company.

To help guide you on institutionalizing your sales and credit & collection group, below are some of the Credit & Collection Paradigms I wish to share with you to be able to improve your company’s collection efficiency:

First, always understand that Credit is a privilege, not a right;

Second, Credit must be granted only to persons/ entities possessing the positive traits and attributes of trustworthiness, integrity, capability and capacity to earn, save and repay one’s financial obligations;

Third, The credibility, collectability and protection of the credit granted must take precedence over expansion or growth; and, must be given positive attention, action;

Fourth, Clients / Debtors must not be given credit much more than what they can reasonably and effectively repay;

Fifth, Credit must not be extended to one who is already habitually delinquent;

Sixth, Each credit applicant must properly be credit investigated, evaluated, properly documented, expeditiously registered with the proper government agency in applicable cases, faithfully and efficiently collected;

Seventh, Credit must not be motivated and granted principally by reason of the collateral or security offered.  It’s the collection of the credit granted arising from being a going concern, which develops positive capacity rather than the acquisition of the collateral or security;

Eight, Set a workable system of monitoring, evaluating and expeditious action and system on perceived and/or actual credit danger signals from debtors

Ninth, Decisiveness and expeditiousness in collection efforts on all fronts of collection venues be positively undertaken within and without the creditor’s organization to prevent, avoid and minimize bad debts;

Tenth, When things are already out of control, don’t be afraid to escalate and seek professional help.

(Mr. Ed F. Limtingco can be reached at 0917-7220521 or at [email protected])