How and When to Threaten Your Customers

November 21, 2012, 2:33 pm Kochie's Business Builders KBB

What to do and when to take a hard line against customers with outstanding bills.

How and when to threaten your customers

When collecting money from your customers, it is important to divorce yourself from the emotion of the situation. It is one of the most frustrating parts about being in business. You have done the work or supplied the goods. You have asked politely for your money more than once and yet have not been paid. What do you do?

Quite simply, it is time to threaten your customer. There are a small number of customers who will only pay you after you have made some sort of threat. It is important that you have used other collection methods to their full potential first. Here is why.

Not all customers are the same. When it comes to the latter period of collecting money, you want to look at each account separately, rather than just have a blanket policy. You have probably heard the saying that 80% of your profit will come from 20% of your customers. This applies to almost every business.

A less well-known fact is that 80% of your problems will come from 20% of your customers. You will be in good shape so long as the 20% of your profitable customers are different from the 20% of the customers giving you the most problems.

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Firstly, decide how valuable your slow paying customers are. If they order regularly and in large amounts, an effective threat is a withdrawal of credit. This threat should be made in writing. You can write a letter to your customers but a far easier way is to convey this message with a Credit Stopped sticker on your statement. The message can be as simple as "CREDIT STOPPED. There will be no further credit until account arrears are settled." You do not need to say much. You just need to come straight to the point.

For many of your customers, such a threat will be all they need to prompt them to pay the account. If your slow paying customers rely heavily on you as their supplier, then such action will cause enormous inconvenience for them. As a result, payment is often forthcoming after you make this threat.

If the payment does not come in, you must carry out your threat and withdraw credit. You have three ways of handling this situation. You can insist on payment in advance for this order or you can ask for payment of your oldest invoice before any more goods or services are provided. However, you have a third option. You can withdraw credit permanently. This is quite fair when your customer has regularly paid late.

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Also, you must be prepared to lose this customer. Note that this is often a good thing. Profit can increase when difficult customers are sacked. For some of your customers, a threat to withdraw credit is a waste of time. Your customer may have made a one-off purchase or only orders from you spasmodically. Then, the threat applicable in this situation needs to be much stronger. The next step is to threaten to take legal action. This step also applies to those customers who did not respond to your threat of withdrawal of credit.

You must be clear on exactly what you are threatening. The two most common threats are legal action or passing the account to your debt collector. There is a difference. Your debt collector or lawyer is most likely in a position to make a threat in a stronger way than what you can. However, they only have the power to make threats. Ultimately, they will need to use the courts to collect your money if your customers refuse to pay.

Before seeking outside help, you should make your own threat. This should be done in writing. You can write a letter but the easiest way is to send a statement with a Final Notice sticker on it.

An example of what such a sticker may say is, “FINAL NOTICE. Payment must be made within seven days or legal proceedings will follow.”

Another option is to send a letter of demand.  Once you make a threat, it is important that you carry it out. Also, you must be prepared to lose this customer.

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