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We hear it all the time: “We are not going to pay those invoices because the person who signed the contract didn’t have authority.” Many go on to say: “It says right in our By-laws that only an officer can bind the company.”
This tells us several things:
As a B2B collection agency specializing in large claims, we know the law is on our side. But, our initial response is not about the law, but to ask questions to learn more. We want to know why they don’t want to pay, because that is the real problem to solve.
We encounter this situation most frequently with service contracts. Typically the debtor signed up for a service of some type, such as advertising, email list access, or an information database. The most frequently explanations we hear as to why they don’t want to pay are:
Once we hear the explanation, we’ll ask a few more probing questions to fully understand the real issue we need to resolve. We also make sure to contact the client regarding the debtor’s actual usage of the service in case that information will help us with the debt collection effort.
Then we pivot to the issue of Apparent Authority, the excuse the debtor is trying to hide behind. Under the law of agency, an Agent (employee) is able to bind the Principal (company) in a contractual relationship with a third party (customer or vendor). Business could not function efficiently if purchasing people could not order supplies and if sales people could not quote prices and complete sales. While these employees may not be Agents of the company able to execute a contract to sell the entire company to someone, they typically do have the authority to bind the company to these daily transactions.
Under Apparent Authority, if it appears that the employee has authority then their actions bind the company. This appearance can be accomplished by providing the employee with company identifiable forms or stationery, a truck with a company logo, or just having them work from the company office. In all of these cases, it is reasonable for the other person to assume that this employee has authority to enter into the transaction being discussed and therefore the threshold of Apparent Authority has been met. Our client’s contract with the debtor is legally binding.
Our collection strategy will be different if we are dealing with a sophisticated business person who is just trying to snow us with a bad excuse versus an unsophisticated business person who is just hoping this excuse will work. So, we typically don’t just explain the concept of Apparent Authority, but ask a series of questions to learn more about who we are dealing with while leading the debtor to this conclusion.
For example: how many people work for the company, who purchases the office supplies, who makes the sales, where do they work from, do they have business cards or access to company stationery, do they bind the company to these transactions? From there it is easy to explain Apparent Authority and volunteer to send them links on the Internet where they can see for themselves that this is a binding contract. From that point forward, we refuse to discuss that issue and get back to the real issue of collecting the money that is legally owed.
At our commercial collection agency, we often encounter anything or can make only small payments. It is difficult to verify this information on a private corporation or unless the debtor voluntarily provides company financial statements. But, if we have permission to run a personal credit report, the report can give us many clues as to how best to resolve the matter.
If the report shows the owner has a stellar credit rating and large untapped balances on credit cards, we can negotiate to get them to borrow from the card issuer instead of our client. Even though they don’t have a legal obligation to use personal assets to pay company debts, if they aren't willing to do this when we have this knowledge, it impacts the decisions we and our clients
have to make during the debt collection process.
Alternatively, if their credit cards are maxed out or there are numerous credit issues, we know the debtor could be on the verge of not having the funds to keep things going. At that point we ask our clients to consider settling for a significant discount to at least get something before it is too late or agree to small payments if that is the best we can negotiate.
Back when I owned a small manufacturing company, I would never give vendors a (I would just go to their competition if they wouldn't extend credit). But, I would have granted permission to run a personal credit report. A couple decades later, I realize what an important tool this can be for a creditor if an account becomes problematic.
Elite athletes mentally visualize technique and success to improve actual performance. Our debt collectors use a very simple technique to get better results. Studies have shown that visualization improves awareness, mood, confidence and outcome. We've been using these techniques with dramatic success at The Kaplan Group for years.
In house collectors typically have 2 objectives, and they are not always completely compatible:
● Maintain a positive relationship with customer leading to future profitable sales;
● Get the money that is already owed and past due.
Early in the debt collection process, in house collectors clearly do not want to jeopardize the long-term relationship with a customer. Customers (at least paying ones) are the lifeblood of the business.
In the training programs we have done for clients' in-house collectors and with our own collectors, we focus on several mental factors:
● Be in an Upbeat Mood
● Have a Positive Attitude
● Use a Calm Demeanor
● Have a good Tone to your voice
● Be Professional
● Be Courteous
● Listen and Understand
● Be Caring and Compassionate
It is widely recognized that having an upbeat mood typically leads to greater success in everything we do. Individuals tend to perform better when their mood is positive. And just as important, this seems to influence other people as well. So, if the collector's upbeat mood rubs off on the delinquent customer that can have a positive impact on the collection process.
With respect to positive attitude, we are referring to having the belief that the debt collection call will be successful. Success can be collecting money, getting helpful information, or building the relationship as a step in the process of eventually collecting. This positive attitude is similar to the visualization technique for sports - the more you believe, the more likely you will make it happen.
Clearly, when dealing with customers, being professional and courteous is very important for maintaining a relationship. A calm demeanor and a good tone are equally as important. A tone with an edge, or outright nastiness, can draw attention away from the main issue - resolving the past due balance. It can also cause the customer to become defensive or angry, neither of which helps the collector achieve the goals of collecting or maintaining a long-term relationship.
The last couple of items are a bit trickier. For decades collectors have been instructed to maintain control of the conversation and not allow it to get off-topic of simply getting the invoice paid. Many collectors work for companies or collection agencies that expect a very large volume of calls to be completed on a daily basis. So, there is a real balancing act between these criteria and taking the time to listen, understand, and express a level of empathy if that seems appropriate to achieve your goals.
For in house collectors, developing some level of a personal relationship with the customer is an excellent way to establish and foster a long-term relationship between the companies. This relationship can be used in a positive way to help collect when the customer runs into cash flow issues. At our commercial collection agency, we know a key factor in our success is often related to taking whatever time is required to listen to debtors, understand their situation, and express some empathy if that is appropriate.
We recognize that the debt collector's approach and tactics need to change over time if progress is not being made using the attitude described above. The change in approach is just another tool in the collector’s arsenal.
Having an upbeat mood, maintaining a positive attitude, and talking with a good tone is not always easy, especially as the day wears on or after a particularly difficult call. Our collectors use one simple trick before each call to help them stay on track: SMILE! You will be amazed at how smiling helps you feel better and gives you a better attitude for the next call.
We have a client who uses a provision in the U.S. Code of Federal Regulations (“CFR”) to collect significantly more than the original balance due on accounts sent to collections. As an example, we collected over $22,000 on freight bills that were only $11,000 if they had been paid on time.
Section 49 377.203 g(1)(ii) of the CFR says “Carriers may, by tariff rule, assess reasonable and certain liquidated damages for all costs incurred in the collection of overdue freight charges. Carriers may use one of two methods in their tariffs: ….The second method is to require payment of the full, non-discounted rate instead of the discounted rate otherwise applicable.”
The key to being able to take advantage of this law is to quote prices at a gross rate with an applicable discount if the customer follows the tariff rules which include paying on time. Most of us see this approach with health care bills, where there is a gross charge and then a discount based on rates negotiated by the insurance carrier, so the consumer or carrier is only responsible for the discounted balance.
Our client has a standard tariff and then quotes discounts typically in the 20% to 55% range so that their prices are competitive. This is what customers pay if they pay on time. If they don’t, our client will send a notice that the discount has been removed and a revised invoice at the gross amount. This typically results in the customer arranging to promptly pay the original invoice amount. But if that doesn’t happen, the accounts get turned over to our agency.
Our client does not want to lose money on accounts sent to debt collections, so we are required to collect, at a minimum, enough above the original invoice amount to cover our fees so the client receives the full amount originally charged. Of course, we are motivated to collect as much as we can as allowed by this law, so the net result is that our client gets substantially more than the original invoice amount on many cases, resulting in a profit on accounts sent to our collection agency.
While we make it standard practice to send these debtors a copy of the CFR section cited above, some refuse to accept that they now have to pay more. Each time we have gone to court, we have been awarded a judgment for the non-discounted amount plus interest and costs. We explain this to debtors and encourage them to settle at a significantly reduced rate rather than going to court, but some insist on experiencing a painful lesson.
What I find most interesting is that most of the freight forwarders and trucking companies who send us accounts do not use this approach. They simply quote a fixed fee. Therefore we do not have the leverage of a dramatically higher non-discounted amount to prompt rapid, profitable settlements and big savings for debtors versus the litigation alternative.
It is frustrating, or worse, when a business customer does not pay their first open invoice on time. Perhaps something just happened at the customer's business after the credit decision was made that has resulted in cash flow problems. But, there is also the concern that this is just a 'bad apple' that was not observable during the credit evaluation process. When trying to collect, whether in house or when assigned to a collection agency, quickly determining which is the real situation can have a big impact on deciding how to proceed and ultimately collecting the money.
In recent articles we've talked about methods to determine if a debtor is telling the truth. But, in a situation where a business has never paid a specific vendor, regardless of the documented circumstances, the overriding question is: "Will this company ever pay anything?" The only way to know is if they make a payment.
In collections, we are all concerned about establishing a bad precedent by accepting a small payment. We don't want customers or debtors to get the impression that small payments over a long term is acceptable. Nor do we want them to think that a small payment from time to time will prevent a vendor from taking more aggressive action. But, at some point with a first time customer who has never paid, finding out if they have integrity is more important than the concern about setting a precedent.
When these accounts come to our collection agency, we quickly pivot to this integrity question if our standard collection efforts don't result in immediate payment. We use 'transparency' as a way to determine if we are working with a professional debtor or a potentially viable payer. We explain to the business owner or executive that we need a small payment just to establish their integrity, and if they can't afford as little as $100 (on smaller claims), we have to assume they will never pay anything unless forced by the courts. We of course explain that this does not set any precedent regarding size and timing of future payments, but is simply to determine their integrity.
We have found that this technique frequently is successful in getting payments from some companies, and this does impact the collection process going forward. Even more importantly, if a company refuses to make even one small payment, it tells us and our clients a lot about how we should handle the claim. This same technique can be used by in house collection departments to give insight on how a specific account should be handled.
Excuse or Explanation? How to get your money!
How to Separate Fact From Fiction
Fact vs. fiction media
“We can’t pay due to cash flow problems” media
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