Credit Protection, Does It Guarantee Payment or Do You Need to Be “All-In”?, by Sam Fensterstock, AG Adjustments

“We have lien rights and we don’t need collection agency”. “We have credit insurance and we don’t need a collection agency”, “We factor our receivable, so we do not need a collection agency”. Are any of these statements 100% accurate? We hear these statements all the time and the answer is no.

Chasing debts can be a difficult and sometimes impossible job for any credit department regardless of your resources. As well as being time consuming, the problems associated with managing delinquent payment and writing off bad debt can be crippling to your company. At AGA, we believe in a proactive “all-in” approach using all the credit and collection management tool and services available to you that will help you avoid many of these complications.

Your perspective regarding how to manage the optimum credit department will shift and change depending on your company and industry. As with any career, your career in commercial credit is an evolution. I’d argue credit and collections is the ultimate onion profession, layered; Regardless of how long you’ve been in the credit profession the best of the best keep peeling back the onion learning more, trimming days.

For those in the construction trade it’s all about secured transactions and the lien and bond process. Are preliminary notices prepared timely and accurately, are deadlines being managed, liens filed correctly suits initiated on time? Some credit managers limit their focus to the collection efforts relating to the owner via his/her property as collateral or through a payment bond on a public job. We do not think you should limit yourself, think “all-in” with your credit tools. Obviously, you’ll need to maintain your rights efficiently in those construction situations where the dollars justify the expense, but what about putting pressure on your debtor? Think “all-in” and place the customer with a collection agency and pursue aggressive 3rd party collections in conjunction with the ladder of supply pressure. Even a personal guaranty, not typically used in construction credit, can assist your collection agency during their process.

The job is get the cash thru the door as quickly as possible. In the construction market, resolving your delinquencies from the bottom of the ladder of supply (debtor pressure from your 3rd party agency) in conjunction with pressure from the top of the ladder (serving your notice and filing your lien to engage the property owner and general contractor to force funds downward) can pay dividends. Save time and money, think “all-in” with the addition of 3rd party agency pressure being placed on your debtor simultaneously will typically help resolve your claim faster than simply serving and filing a notice or lien. In most cases, without the expense of filing suit against a payment bond or foreclosure, you won’t be giving up your rights to proceed should that need arise. Lastly, don’t assume your notices and liens are going to be 100% bullet proof, when it’s time to file a lien it’s time to place the account for collection. Of course, it’s important to work with an agency that understands construction credit.

Credit Insurance is another tool. It is commonly used to increase sales, increased borrowing availability, and help prevent catastrophic loss. The cost of credit insurance is based on the accounts that are subject to the insurance and their inherent risk. The cost for the policy will be a percent of your sales and depends on many variables, including trading history and historical debt loss of your company, your trade sector, and your customer portfolio.

Deductibles for credit insurance can also be an issue. The analysis of the solvency of your clients is followed by the setting up of limits carried out by the insurer. Credit insurance covers your company for loss of the credit insured, but rarely covers 100% of your accounts receivable, it’s usually up to a predetermined percentage. Depending on the risk category, the insured’s deductible can vary between 5% and 20%. The deductible is the amount that the insured must pay toward his own losses before he can recover from the insurer. Like any insurance submitting a claim can affect your premium therefore your “all-in” approach should include 3rd party collection efforts prior to submitting a claim to your carrier thereby reducing your need to submit the claim, paying the deductible and most importantly getting you paid faster.

Factoring is another tool that is used in many industries where extended terms are granted like apparel and furniture. However just because you have factored your receivables doesn’t mean that your fully protected. The most common type is Recourse Factoring where if your customer does not pay the factor on the factored invoices, you must repay the factor and collect your delinquent customer on your own. The other type is Non-Recourse Factoring where if your customer does not pay due to bankruptcy or insolvency you do not need to re-pay the factor. Given that Recourse Factoring is the most common, just because you have it doesn’t mean that you will never need to engage with a collection agency and sometimes you may have to go “all-in” and leverage every resource you can to help you collect what you are owed.

Conclusion

Waiting until customer’s invoices are past due is still a typical approach many credit & collection departments take to manage their accounts receivable, but this just creates problems and leads to a greater probability of incurring bad debt. Mitigating credit risk from the start, with an “all-in” strategy will enable you to better manage your accounts and prevent cash flow problems in the future.

Today, many organizations both large and small are taking a closer look at their credit & collection management process. Many have taken this analysis a step further by addressing all aspects of their credit process performance including efficiency, cycle times, available outside credit tools and their connection to performance. Understanding all the tools of your trade; To include credit applications, personal guarantees, credit reporting/monitoring, security and the utilization of a professional, methodical collection agency is the starting point then determining the combination that’s right for your business will have your department consistently in the best possible position to get paid, that’s “all-in”.

Sam Fensterstock is Vice President of AG Adjustments, CMA’s chosen collections partner. For over 40 years, AGA has been the most respected commercial collection agency in the nation. The company assists corporations with improving cash flow, while preserving a positive image with customers. It accomplishes this by employing the best and brightest talent in the industry, with low turnover and unparalleled tenure.

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