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7 AR Policies to Lower Your Company’s Bad Debt

Jul 23, 2019

Tracking down overdue payments is a challenging task for any company — but part of the regular work for your revenue cycle team. However, as your team knows, the longer a payment sits uncollected, the harder it is to collect.  

Avoiding Bad Debt with the Right AR Policies

Bad debt means the payments you cannot recover. While you might later write these off, it’s still less money coming into your business, which means cash flow problems and higher costs to the rest of your customers. (You might also keep track of doubtful debt.)

To reduce the amount of bad debt at your business, put into place policies that encourage payment and deter non-payment. Sounds easy, right? Make sure your accounts receivable team sets these up now: 

Age of account graph

  1. Set payment terms to “Due upon receipt.” This deadline creates a sense of urgency for all payments. While offering a due date or giving people 30 days to pay seems like the right approach, it often means people will toss the bill aside to deal with “later.” “Later” may lead to forgetting about it entirely or misplacing the email or paper bill. 
  2. Set a collection expectation. Make it known in writing from the beginning of your client relationship that the account will be turned over to a collection agency if not resolved in a specific number of days. That number should be fewer than 120 days. Remember: the older the debt, the less likely it is you will recover.
  3. Establish a collection policy that includes fees. Your new client paperwork should include the terms, “Account may be subject to collection fees if delinquency results in the account being turned over to collections” or something similar. The extra fee collected reduces your costs and is one more incentive for clients to pay on time (or at least before collections takes over). 
  4. Conduct credit checks. For small transactions, you may prefer to skip this step. But if you manage more significant dollar amounts, make sure your credit check policy is outlined and specific. Many companies fall into the trap of not checking or extending credit too often. The process must be established with clear instructions for how to evaluate potential customers and when, or if, it’s OK to override the policy. And don’t forget to go back and review long-time customers periodically. 
  5. Offer prompt pay discounts. Offer a discount (a percentage that makes sense for your company) to those who pay early or pay promptly. So instead of a due date, you might display a lower dollar amount “if paid by” a specific date — often within 10 days. Prompt pay discounts significantly reduce the chance of sending that item to collections. Your AR team might choose to use this judiciously, sending this option to those who tend to pay late rather than including those who always pay on time. 
  6. Enforce a COD (cash on demand) policy. If your business has repeat customers, put into place a process that ensures no additional services are provided unless delinquent accounts are cleared up. 
  7. Require a personal guaranty. A guaranty won’t work for every company, but if your business handles large-dollar transactions or long-term contracts, require a personal guaranty as part of the application process. If the company goes defunct, the agency or attorney collecting the debt can use the personal guaranty as an additional resource for collecting payment. 

Do you have questions about collecting bad debt? Contact us to learn more about how we can help.