Top 5 Debt Collection Techniques to Reduce Bad Debts

Introduction

Most B2B (business-to-business) organizations run their business on credit, which means debt and collection of dues are critical for their business. Debt collection is the process of collecting payments from your customers for the goods delivered or services rendered. In most cases, there is a prior understanding of the terms of payment that follow a sequence starting from the order and ending with the collection of payment.

However, there are many factors that could hinder the collections process, and you need to have effective debt collection techniques to help you. This could range from preventive measures to strategies that help you once the debt has gone bad and the payment is not forthcoming.

Before we deepdive into it, check out these 10+ collections email templates used by collections professionals across 700+ leading order to cash teams to ensure 2X productivity in their collections teams.

Key challenges faced by collections teams

Collectors encounter obstacles such as managing a high volume of delinquent accounts and limited time to cover all accounts in their worklist. The following issues are fundamental flaws in the ideal collections process:

• Inconsistent and outdated data: Data is essential to the collections process, but inconsistencies and inaccuracies can create significant problems. Collectors may waste time trying to collect payments that have already been made or applied incorrectly, leading to redundant efforts, poor customer relations, and a high DSO.
• Inadequate correspondence: While collections correspondence is crucial, it is equally important to focus on the groundwork of customer collaboration. Collectors may focus on non-critical customers who would have paid regardless, rather than prioritizing those who require more attention.
• Improper customer prioritization: Collectors often rely on static parameters such as due dates, invoice values, and customer segments to prioritize accounts. However, these factors may not be sufficient to deal with dynamic changes in a customer’s accounts payable functions.

It is imperative that finance leaders continually assess the maturity of the collections process to understand where they stand in terms of the collections management process and ensure that it is running efficiently.

Top debt collection strategies to reduce bad debts

• Prevent rather than regret

  The saying ‘prevention is better than cure’ has never been more apt than in the collections scenario. One of the most effective collection strategies is to have a robust credit check and onboarding process in place. Ensuring that you do a thorough credit assessment and onboarding while offering goods or services on credit is one of the best strategies to adopt. You can have a process in place where customers can apply for credit terms within your accounts receivables software that is easy to use and enables the collection of comprehensive information.

• Prioritize and plan

  Another collection strategy is to prioritize the customers you need to start calling even before you start the calls. Obviously, you need to know the aging of the accounts and the amounts due to make effective collection calls. Many businesses fail to recognize this factor and blindly make calls to all customers, even those who pay regularly. Calling customers who have paid, irritates them and causes unnecessary friction. You can leverage AI-based Collections Software to ensure that your collection analysts can prioritize and plan their customer calls for maximum efficiency. AI can accelerate receivables recovery with smart customer segmentation that identifies high-risk customers, predicts payment timelines with collection tracking, and customized dunning strategies.



• Offer more options

  Most companies do not realize that customers often have the ability to pay but delay payments because the process of making the payment is too complicated. A simple way to mitigate this is by offering more options for payment to customers. In fact, HighRadius’ AI-based E-Invoicing and Payment Software will enable you to embed a payment link in the invoice itself. This way the customer will be able to take action immediately. Moreover, it allows your customers to make payments through 150+ payment methods, including ACH, Credit Cards, PAD, PayPal, and GiroPay, among others.

• Invoice correctly and on time

  Perhaps the most important collection strategy and sadly, most ignored is the importance of sending accurate invoices on time. Your simplest and most effective collection strategy should be to ensure that your invoices are detail-rich and sent out on time. You should ensure that the invoices reach the customers with enough leeway to allow them to plan and arrange the funds to pay your invoices.

• Bridge communication gaps

  This strategy ties in with the first one we talked about where you are better off preventing bad debt rather than chasing them with prudent credit policies. In addition to that, also ensure that your sales team, which is responsible for getting customers to buy your products or services knows the credit policy and process for credit terms. This way, the sales team will do an initial screening even before proceeding with a credit-based sale. At the same time, ensure that the communication lines between the sales and collection teams are always open to enable better cooperation and improved collections.

To overcome significant challenges in collections, enterprises should consider adopting advanced technologies, such as AI/ML, that can provide real-time data, streamline communication, and prioritize accounts based on dynamic factors. This can help collectors be more efficient, improve customer relations, and ultimately increase collections.

FAQs

What is the most effective collection technique?

The best collection strategy would be to empower your team at every stage of the process. This would mean setting processes and mechanisms in place, leveraging technology to ensure continuity, removing silos, and making the process of collections seamless.

How to improve collection skills?

One of the best ways to improve collection skills is to encourage cross-team collaboration, which should be focused mainly on the sales and collection teams. Make each team aware of the pain points the other team goes through so that they work on preventing bad debts before they occur. Improve communication skills to enable negotiation and resolution.

What are the fundamental elements of effective collection management?

Effective collection management starts with the credit onboarding of the customer and ensures that the necessary steps are taken at every stage of the process. This means efficient and accurate invoicing, enabling payment options, and dispute management.