Collection Letters
When your customers fail to pay their bills on time, you must try to collect. If you follow conventional business practice, you are likely to use letters in your efforts. You could use other ways—for example, telephone calls or personal visits' But letters are the, most common.
A Series of Efforts
In studying collection letters, you must first understand how businesses usually collect past-due bills. Typically, their collection efforts consist of a series of steps. Each step is a contact (usually by mail) with the delinquent customer. The first step is the bill that is sent on the due date. If this bill is not paid, a second or even a third bill may be sent. Sometimes a few reminder words, such as "Please," "May we remind you?", and "Probably you have forgotten,"' are added to a past-due bill for extra strength. These reminders may take various forms printed enclosures, stickers, or stamped messages.
If the reminders fail to bring in the money, the efforts get stronger. Typically, a letter is sent urging payment. If this one fails, another is sent—and another. The letters get progressively stronger. As we shall see, how many letters are written depends on company policy. When the succession of letters fails to bring in the money, a final letter ends the mail effort. Additional action, through credit bureaus or the courts, could follow.
In a sense, the buildup of collection efforts resembles a stairway (see Figure 11-1). Each step represents a collection effort. The first steps are called early-stage collection efforts. Mainly these are the reminders. The assumption at this stage is that the debtors will pay. The company need only remind them.
Following the early stage, comes the middle stage. Here the company's purpose is to convince the debtors that they should pay. This truly is a persuasion stage: The company's goal is to sell the debtors on' the idea of paying. This stage makes up the bulk of most collection series.
After all persuasive efforts to collect have failed, the letters must stop. So a final stage must end the collection-letter series. In this stage, the company's objective is to convince the debtors that they must pay. Called last-resort, this stage consists of just one letter. Because this letter is so different from the others, it justifies being a stage in itself.
Throughout the will-pay, should-pay, and must-pay stages, we assume, from an ethical point of view, that the debtors can pay. That is, they have the financial ability to pay. If debtors demonstrate that for some reason they cannot pay, this fact becomes a possibility for modifying the stairway. If an unforeseen circumstance (death of a spouse, divorce, loss of job) occurs, most firms work out a payment schedule based on the facts of the one situation. This schedule changes the stairway. But such unforeseen happenings are only one of several factors that necessitate adapting the number of steps ana timing between collection efforts.
How to write the perfect collection letter
In this article, you will learn about the various kinds of collection letters. You will also learn what actions you can take before turning an overdue account over to a collection agency.
Do not suggest in any collection letter that the customer might be dissatisfied with the product or service he/she purchased from you.
The point of the collection letter is always to collect the money that is owed. A new type of collection letter is sent each time you escalate your demand for payment. Below are examples of several types of collection letters that may help you to collect your money.
The Reminder Collection Letter
The first collection letter should only be a friendly reminder. Assume that the customer has forgotten to pay and courteously invite him/her to pay promptly. Most people will make a payment after a couple of reminders. If there is no response to these reminders, you should assume that the customer is not paying because of financial, medical, or other personal difficulties.
Suggestions for a typical format:
Send a copy of the original bill.
Stamp on it Reminder or Past Due and highlight the amount past due.
Include a short statement indicating the amount due, the due date, late charges (if any), and the account number.
Make sure the address where the customer should send payment is plainly indicated. Including a pre-addressed envelope for payment (with or without postage) is also helpful.
If the customer has not even made a partial payment after a couple of gentle Reminder Collection Letters, you can send a final reminder collection letter to ask why the customer is not paying. A final reminder letter should explain that there will be consequences for continued nonpayment. If no payment on the amount owed is received, then you will need to take a more aggressive approach in follow-up collection letters.
The Inquiry Collection Letter
Before you employ any harsher means, try to discover if the customer has extraordinary circumstances that are preventing him/her from making any payment. You can help maintain a good relationship with the customer and go a long way toward collecting your debt if you are sensitive to any potential problems. The Inquiry Collection Letter demonstrates your willingness to help the customer solve his/her current financial difficulty by offering new terms. If you are willing to accept a partial payment now with regular payments after that, most people in financial difficulty will be grateful for this option and agree.
Remember, it is better to collect your money through a series of payments than not to collect it at all. It is also better to work with your customers than to alienate them as their present difficulties may resolve and they may prove to be more reliable in the future.
Tip for the first inquiry letter: Make a request for prompt payment, and add your willingness to help the customer by offering new terms for repayment.
Tip for the second inquiry letter: Use positive wording, but state firmly that the customer will pay a penalty for continued nonpayment such as a late fee, a collection fee, or interest on the amount owed.
The Appeal Collection Letter
If the customer fails to respond to any of the Reminder Collection Letters or to the Inquiry Collection Letters, you must take a more aggressive approach. Because the customer has not responded to date, you should assume that he/she will probably not respond to any further demands for payment. This is why many organizations at this point turn their debtors over to a collection agency. If you do choose to continue the collection process yourself, there are two basic approaches you can take:
Positive appeal approach: Try to appeal to the customer's sense of fairness, personal pride, or his/her desire to maintain a good credit standing and its connected privileges.
Negative appeal approach: If the positive approach is ignored, inform the customer that continued nonpayment could result in various penalties:
the loss of his/her good credit standing and its connected privileges the initiation of legal action to reclaim any purchased goods; any services will be discontinued he/she may incur additional debt through collection fees and/or interest on the amount owed
The Ultimatum Collection Letter
If the customer does not answer any of your collection letters, you can give him/her a final chance to pay. The Ultimatum Collection Letter needs to state the specific action you will take if the customer does not send payment by a certain date. Your statements should be fair, reasonable, and logical. In your last letter:
First review the history of the account: what the customer purchased, your repeated efforts to collect, etc.
Give a deadline for payment or for the customer to commit to a repayment agreement--otherwise you will take legal action to reclaim the purchased goods and/or turn the account over to a collection agency.
Be careful not to use name-calling or to make accusations, which are both illegal. Always be careful with what you put in print! Simply state the facts and why his/her inaction is causing you to take action.
If the Ultimatum Collection Letter fails to bring results, be sure to follow through with your stated action.
Note: Debt collection is not an enjoyable pastime, but if you follow these logical steps in preparing your collection letters, you will succeed in collecting payment on many of your delinquent accounts.
Credit Collection Form Letters
Whether or not your business chooses to use cash discounts or delinquency charges, a systematic follow-up procedure should be employed with all past-due accounts. Usually, this will take the form of a series of letters or telephone calls or both, as required.
First Collection Letter
When an account becomes approximately 15 days past due, the customer should be sent the first collection letter. Since the account cannot be considered seriously delinquent at this time, the tone of the letter should be moderate. Later letters should establish a firmer tone so that the customer is made aware of the seriousness of the situation.
The 15-day past-due letter should read about as follows:
Dear Mr. Athavale,
According to our records, your current balance due is $473.25. Of this amount, $215.38 is more than 30 days past due. As you know, our normal terms require payment within 30 days after the invoice is sent to you.
Since you have established an excellent credit rating with us in the past, we are surprised to see a problem arise at this time. If there is some error, or you are unable to pay the amount due immediately, please contact me so that we can correct the situation or make suitable arrangements for prompt payment of this obligation.
Thank you for your attention to this request.
Very truly yours,
Jim Madison
Second Collection Letter
A second letter, 30 days later, might read as follows, if no response has been received from the customer:
Dear Mr. Athavale,
We have not received any response from our statements of the last two months nor to our letter of September 15. Your entire account is now 45 days overdue, and you owe us a total of $473.25.
If there is some reason why this payment cannot be made immediately, please contact us so that we can make arrangements that will be mutually agreeable. Perhaps we can work out a payment schedule that would be realistic for your present circumstances.
Naturally, we do not want to endanger your credit rating or destroy the good relationship that we have maintained in the past. Therefore, would you please take care of this obligation immediately so that we will not have to file an unfavorable report with the credit bureau or resort to the use of a collection agency or an attorney.
We have enclosed a self-addressed envelope for your convenience. Please return it as soon as possible with your check for the balance owed.
Very truly yours,
Jim Karporia
Third Collection Letter
If this is unsuccessful, a stronger letter should be sent in 30 days:
Dear Mr. Athavale,
We still have no response from our statements of the past three months nor from the letters that we sent you on September 15 and October 15.
Your entire account is now seriously past due: It is obvious that our efforts to clear the account on a mutually agreeable basis have had no impact. Unless we receive payment from you within seven days, or can work out a mutually agreeable arrangement to discharge this obligation, we will have to report the matter to the retail credit bureau.
Subsequently, the account will be turned over to a collection agency or to our attorneys for further action. Since this is a costly procedure for both of us, and will cause serious damage to your credit rating, I would suggest that you call immediately so that we can clear the matter at once without resorting to such procedures.
Very truly yours,
Jim Karporia
As you noticed, the tone of each letter became progressively stronger with suggestions of more serious action introduced in each case. The tone that you would want to establish in such "dunning letters" will often depend upon the type of relationship that you maintain with your customers. However, the ground rules should be clear. Past-due accounts should not be ignored.
Telephone
Frequently, an even more persuasive approach is through use of the telephone. The ground rules are basically the same. You must become progressively firmer with each call and indicate that stronger measures will be used if necessary to ensure prompt payment.
The telephone has the added advantage of flexibility since you can be more direct with better knowledge of the individual account.
You acquire this knowledge through asking questions such as the following:
"What seems to be the problem? We never had difficulty with your account in the past."
"How much would be a reasonable amount for you to pay each month? Perhaps $50, $60?"
"How soon can we expect payment of this amount?"
Try to avoid questions that can be answered "yes" or "no." If the creditor gives you an answer such as, "I'll mail it today," answer with: "I appreciate that. Then I can expect it in two or three days. If I don't have it by then, I'll call you back."
Be sure that the creditor realizes that you are totally aware of the situation and that you do not intend to ignore it.
If your own collection efforts fail, there are two courses of action that are left to you - the collection agencies and the courts.
1st Letter
[Debtor's name]
[Street address]
[City, state zip]
[Month day, year]
Re: [Account balance]
[Account number]
Dear [debtor]:
This is a reminder that your account of Rs.________ was overdue as of _____________, ____. Please play this account promptly. If you have already put the check in the mail, we apologize for the inconvenience and thank you for your payment.
Sincerely,
--------------------------------------------------------------------------------
2nd Letter
[Debtor's name]
[Street address]
[City, state zip]
[Month day, year]
Re: [account balance]
[account number]
Dear [debtor]:
This is the second reminder that you owe us $_________. Please pay this account promptly. We would like to continue doing business with you, but we need your cooperation and payment to do so.
Thank you for your prompt attention to this matter.
Sincerely,
--------------------------------------------------------------------------------
3rd Letter
[Debtor's name]
[Street address]
[City, state zip]
[Month day, year]
Re: [account balance]
[account number]
Dear [debtor]:
This is your final reminder that your account of Rs.__________ is past due. It has been past due since ______________. If payment is not received by _________, we will have no alternative but to turn your account over to a [lawyer or collection agency] for collection.
Thank you for your prompt attention to this matter.
Sincerely,
FIGURE: Diagram of the Collection Procedure
Late (must pay) stage last-resort letter
Middle (should pay) stage-persuasive letters
Early (will pay) stage
Statements, reminders, mild letters
Note: Number of steps depends on firm policy.
Exercise I
Answer the following Questions
a. Role of the Credit Control Department
b. Objectives of Collection letters
c. Types of debtors
d. Collection Methods
e. The Collection Series
- "Collection Letters should be regularly sent—but they are not routine". Discuss.
- Mention some of the appeals that could be made in collection letters to induce debtors to settle their accounts.
- Do you think is it possible to collect the account and keep the customer? How?
- "The tone of the collection series must be firm but not insulting in order to achieve results." Illustrate this statement with suitable examples.
- Discuss the objectives of the collection series?
- Explain why it becomes necessary for the credit man to send letters in a series requesting payment.
- Explain how you would tackle different types of debtors during your collective campaign.
Exercise II
Draft the following letters
- Write a letter to M/s Ali and Sons, Turner Road Bandra, Mumbai 400 050, reminding them that they have neither answered your two previous letters nor settled their account with you. Inquire about the reasons for the delay in payment and suggest alternate methods of payment.
- A regular customer has failed to reply to the preliminary invoice sent to him. Giving him the benefit of doubt write a letter enclosing a duplicate copy of the bill.
- Even after repeated trials, you seem to have failed to retrieve Rs.1, 75,000 from Lalwani and sons for three months after the due date. Write a mildly threatening letter in order to collect dues.
- Premanad Dehpandey & Sons have overstepped the credit limit set by Kishanrao Biradar & Sons by 60 days. After repeated letters they have neither replied nor explained anything at all. Write that you are sending a legal notice, and explain the background in detail.
- M/s Arjun Singh and Sons, Mumbai have not paid an overdue amount of Rs. 50,000/- in spite of repeated reminders. Write a letter to them urging them to honour their obligation within 15 days. Point out to them the importance of maintaining their credit reputation.
- Write a letter to the Sunder Milan Co-operative Stores, Pune reminding them that they have neither answered your two letters nor settled their account with you. Enquire whether they are in any difficulty and suggest payment by installments.
- M/s B.C. Shukla & Sons, Khalapur, have not paid an overdue balance of Rs. 84, 050 in spite of your repeated reminders. Make an appeal to their credit reputation and urge them to honour their obligation within ten days.
- M/s. Brijlal & Bros. Lucknow, owe you Rs. 120,000/- on account of the goods supplied three months ago. They pay Rs. 15,000/- and send you a fresh order. Write a tactful letter acknowledging receipt of the amount and refusing to give further credit unless the balance is paid.
- You have received a letter from Salunkhe & Co.,
- Draft a suitable reply, politely turning down their proposal and making a reasonable counter proposal.
- You are unable to accept the request of M/s. Ashuthosh Patil & Sons,
- Tejas Dighe Company Pvt. Ltd., Pune, have proposed to pay you the outstanding account of Rs. 134,000/- in ten monthly installments. Write a reply stating your reasons for not accepting their proposal and making a suitable counter-proposal.
- All your reminders have met with no response from the Okhla Trading Co., Ahmedabad, who owe you a balance of Rs. 2,042,000/-. Write your final collection letter for the amount which is six months over-due.
- A customer whose account is overdue writes to you for extension of time. Write to him stating that his request will be granted if he pays at least 40% of the due amount within a week.
- The proprietor, Salamander Stationary Mart, who has received two letters from the Modern Stationery Manufacturing Co. Ltd., Nashik regarding the settlement of his overdue accounts, requests the Creditor that he would settle his account after two months as there is an unexpected decline in his business. Draft his letter and a suitable reply.
- Write a letter to the Oriental Trading Co.,
- Your old customer Mr Dighe is in arrears to you for some months. Write a; tactful letter suggesting payment by installments if he is in financial difficulties.
- M/s Kapoor & Sons, Pune, have not paid a balance of Rs. 600,000/-. in spite of your repeated letters. Appeal to their credit reputation and urge them to honour their obligation within 15 days.
- Prabhakar Trade Services bought typewriters and other office equipment from Olympia Business Machine Ltd., on part payment of Rs. 20,000/-. The balance d Rs. 25,000 hag not been paid in spite of reminders and appeals for payment, Draft a letter to be sent to Prabhat Trade Services by Olympia Business Machine Ltd., asking them to make the payment within ten days.
Messers. Shukla and Sons, Lucknow, have not paid a balance of Rs 1,20000/-
ReplyDeletein spite of your repeated reminders. Write an email on the behalf of Messers.
Gokhle and Sons, Pune to urge them to honor their obligations within
10days. Invent necessary details.