The Psychology of Commercial Debt Recovery – Part One

Millions of businesses, especially small to mid-sized firms, want to grow and prosper by serving their customers well—but they also expect to be paid promptly for their product or services. In our twenty plus years in the commercial debt recovery business, we’ve observed a universal fear among people in business: They want the money they’ve earned but they’re deeply afraid to press too hard lest they upset customers who not only might not pay but could also take their business elsewhere. These customers might also tell all of their friends now bad that business was. That fear needs to be taken seriously, even by giant corporations with similar concerns.

With the knowledge gained from assisting thousands of companies worldwide in recovering their receivables, we’ve found that most credit department managers like a relatively mechanistic approach. Meaning they want to know about the various kinds of debtors, the different incentives that motivate people to pay, and the ways of communicating these messages to debtors. Credit managers also seek excellent legal forms and information.

For instance, here are questions to ponder:

1. What do you do if the debtor isn’t motivated to pay?
2. How do you learn to listen to what a debtor is really saying (or not saying) versus what words he’s telling you?
3. How do you learn to handle any type of resistance for being financially responsible?
4. How do you get your company to create and communicate a clear payment policy to all customers, so they know the exact the rules of the game?
5. How do you get sales and credit working together?
6. How do you keep the boss from interfering in credit granting or collection matters when that’s damaging to the business?

These and other questions are psychological in origin. Facts and systems alone won’t give satisfactory answers. Here’s another question: How can you ask for money effectively and confidently when you’re usually uncomfortable doing so? Many people are uncomfortable about asking for payment, and the typical solutions usually don’t provide relief.

This series, which focuses on the psychology of commercial debt recovery can by used as a training guide for salespeople as well as credit managers and collectors. Collection issues can sink a business and are a symptom of a systemic fear about how the business is positioned in the marketplace. Collection problems that are systematically addressed affect a business as much as improved sales.

What’s the Big Deal About Collecting?

Money evokes strong feelings that can end in violence and the odds of winning when gambling in a casino are slim to none. But because the payoff from gambling can be huge—greed, hope, or desperation let the mind forget the odds, as do the state lotteries.

These examples illustrate that money matters deeply. Collecting money for a product or service that was provided is serious business.To a business, collecting means getting paid—in full, on time, and without hassle. Accounts receivable is usually the second largest tangible asset of any business, after planning and equipment. Collecting that money is a major concern.

For a business, recovering outstanding debt can present major obstacles. In our next article in this series, we will analyze the main reasons for the obstacles. The magnitude, persistence, and complexity of the problem can prevent businesses, large and small, from achieving their full potential. Not only that, it’s irritating to not get paid as promised. Surprisingly, the nature of collection problems is the same for both small and large businesses, but one would surmise that the larger, more established companies would have the experience and systems in place to spot and correct collection snags before they occur, but this isn’t the case.

In our twenty years of commercial debt recovery, consulting, and training of every type of business, there is a simple explanation. The common denominator is people. Business is people interacting with other people, and human beings express themselves in a variety of ways. The exchange of money for products and services is not a mechanical process. Even with clear and written credit and collection policies, breaking or bending the rules can be justified easily.

Small companies are especially vulnerable. Because they watch their accounts receivables closely, what may not be clear to them is how to best manage those receivables in light of the company’s other goals such as growth, new products, and diversification.

To some business people, the way to deal with collection worries is to finesse them by selling more. But that’s almost like the gambling system that calls for doubling the bet each time you lose. That one last bet can wipe you out.

Let’s compare selling to collecting based on a business that earns a 20 percent profit before taxes (PBT) on sales. Start with a $1,000 sale that, if paid for, results in a $200 PBT. Suppose the buyer doesn’t pay. What are the choices for replacing $200 profit?

1. Invest another $1000 to produce a comparable sale and the resulting $200 profit.
2. Invest $100 in a collection effort to get paid for the original sale and pocket the same profit.

This example is simplistic, but the comparison is valid, pointing to the need for clear, analytical thinking about two key business issues:

1. How much should be invested in the credit and collection functions?
2. What should the company policy on granting and enforcing credit be?

Stay tuned for our next article in our series, focusing on the obstacles of debt recovery.