It's not luck or magic. Successful collection agencies understand the psychology of the late payer. Knowing some of the tricks of the trade will go a long way toward improving your collection percentage.

A successful collection strategy starts at the beginning, not the end. Are you running a credit check on every new customer? It's getting very easy and inexpensive for even the smallest of businesses.

The credit application should include a clear statement of interest rates and other consequences of late payments, says Stephan Kotkins, [former] President of ASAP Collections Inc. of Portland and a 30-year veteran of the industry. "It's important to educate the customer frequently from the very beginning. If you're a construction company, for example, have a sign hanging on the wall, 'Payment due on completion.'"

There's a lot of information you can get on a company in addition to running a credit check. Ask for bank and trade references. What is the potential client's legal entity? There's a huge difference between a limited company and a sole trader when it comes to resolving debt. A sole trader is liable for his or her entire personal assets for debts incurred.

Make sure that you have a written, well articulated set of terms and conditions under which you will extend credit. Decide how much of your sales you can afford to put out on credit and don't go beyond that limit.

Service agreements, promissory notes, engagement letters and mutual release agreements are examples of documents that will strengthen your case in the event of litigation. Make sure that you have all of the company's phone numbers and addresses, including invoice, headquarters and delivery locations.

Nobody likes the nasty business of collecting debt, but timeliness may be the most critical factor. Monitor the status of your accounts receivable frequently and act quickly when there's a problem.

A collection agency's strategy boils down to two simple components -- phone calls and letters. That's where your strategy should begin as well.

The more timely and consistent you are in collecting a debt the higher your chance of success, says Kotkins. "If he says he'll pay you an installment in 30 days, call him on the 30th day if you haven't received payment. If you wait another 10 days, he thinks, 'Hey, I've got another 10 days next time.'"

The squeaky wheel gets the grease. All other things being equal, who are you going to pay first -- the company that's calling you twice a week for payment, or the company that's calling you twice a month?

An effective phone collector breaks the process into four steps -- identify, develop, discuss and finalize, says Kotkins. "Ask who, where, what, why, when and how. Those are questions that can't be answered yes and no. Have them make a promise. People hate breaking promises."

It's important to remain professional, he adds. "Don't get involved in the personal aspect of the debt. Maintain control of the conversation at all times."

It might be that the client has a legitimate reason for being late and can pay by a certain date. Resist the temptation to react angrily if you don't get the answer you want. Don't alienate a potential long-term customer by coming on too strong in the early stages of a collection effort. Don't turn the debt over to a collection agency if you want to do business with the debtor again.

Letters are not quite as effective as phone calls or in-person visits, but are a much better alternative than procrastinating. There are many sample collection letters that can be downloaded for free online. The best strategy is to use a series of letters than begin in a friendly "maybe you lost our invoice" tone and become increasingly urgent if there's no response.

Don't wait beyond 90 days before you contact a credit agency, Kotkins says. "The longer you wait, the more people pecking at the pie."

It's important to alert the debtor well in advance that you will be taking the "adverse action" of turning the debt over to a credit agency and to follow through on the specified date, he says. "We're a tool, not a salvage agency. We should be a part of the company's collection strategy."

How much will a collection agency cost? That depends on whether you're buying flat-rate service or contracting on a contingency basis. You won't have any expenses if you go on a contingency basis, but will forfeit 35 to 50 percent of the debt as a collection fee.

Collection agencies fall into two categories -- business to business collection agencies such as Kotkins' that generally work for a flat fee ranging from 25 to 33 percent and consumer debt agencies that collect debt owed by individuals. Consumer debt agency customers typically include hospitals, lawyers and retail stores. Consumer agencies must adhere to stricter guidelines than business to business collection agencies.

Another option is to pay a collection service a relatively modest amount for mailing two or three letters and then going to a contingency basis if the letters don't work.

Finally, if phone calls, letters or collection agencies aren't going to do the job and litigation is the only remaining option, proceed immediately and resist the urge to announce it the debtor. That only gives advance warning and an opportunity to hide assets.

portland@bizjournals.com | 503-274-8733

(Note: We did not "place" this story, the Portland Business Journal called on us.)