After being in the ARM (accounts receivable management) industry now for many years, I can honestly say I’ve heard almost every story in the book from CEOs, CFOs, healthcare administrators, doctors, dentists, lawyers, accountants, billing managers to janitors as the reasoning or excuses from clients as to why their outstanding balance had not been paid.
Here are some common excuses:
- They have been traveling.
- They just lost their job.
- They just moved and were not getting the invoices.
- They came across financial hardships and needed some extra time.
- They just had surgery and have been in the hospital so needed some time to get their things organized.
- They weren’t satisfied with the service or product so didn’t feel the need to pay for it.
- They were used to paying all their vendors after 60 or 90 days.
Here are some off-the-wall responses:
- They said they were going to get their checkbook from their car and never returned.
- They didn’t remember ever ordering that product or service.
- They’re going through a divorce and to call the soon to be ex-spouse who is responsible for the balance, not them.
- They were wondering if their creditor would be willing to barter instead.
It might seem odd to hear even the common excuses listed above if you aren’t in a business that extends credit or if you are in general a good paying consumer.
It may even seem like an episode from a spin off series of the Twilight Zone where customers walk into Costco, load their shopping carts full of items, walk past the cash registers, give the friendly greeters their mailing address to send them a bill and walk right out. Luckily for Costco, it isn’t the case as they don’t extend credit (only through a 3rd party financing credit card partner). Unfortunately for millions of other businesses around the world that essentially happens every day.
In my opinion the most vital thing to understand if you are in a business that extends credit or carries an accounts receivable is:
NOT ALL DEBTORS ARE CREATED EQUAL
I explain to my clients that they’re only going to have to deal with 4 types of payers. I laughed the other day when a client told me that 4 payers is 3 more than he’d care to deal with. Can you blame him?
Here are the 4 Payer Types:
- Dutiful (Always pays their bills on time, probably has an 800 or higher credit score.)
- Distracted (That busy working professional who is good for the money but hasn’t yet gotten to all 10-12 monthly bills on their kitchen table. They simply need a reminder text, email, phone call, letter and they’ll pay up.)
- Disrespectful (Has disregarded and ignored at least 2 billing cycles from the same creditor and hasn’t called to explain or apologize about non-payment. Are paying some bills more timely, but they have chosen which bills to put off that don’t seem so urgent.)
- Deliberate (Have expressed to their creditor verbally that they will not pay the balance owed or expressed through non verbal cues of long periods of silence, mail returns and disconnected phone lines. These are the most high risk debtors.)
Now be honest with yourself, which category do you fall under?
I want to note that, in my experience, these 4 payers types are found in all socio-economic income levels, meaning some wealthy people fall into the category of Deliberate high risk debtors while people from low income levels can be in the category of Dutiful payers.
I won’t get to into details about the psychology of why these 4 types of payers/debtors respond, react or do nothing in this article. What I can tell you is by simply understanding that there are 4 payer types and that not all debtors are created equal puts you FAR ahead of the game and your competition.
The BILLION DOLLAR question is how do I efficiently and professionally address each of the 4 payer types to recover my past due balances? (That is if you’re in a business that extends credit, if you don’t have to worry about this then lucky you!!)
I would love to hear your comments, create some dialogue around the 4 payer types and hear your ideas on how your business effectively maximizes your accounts receivable in-house.
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