This article provides a multitude of advice from various sources on effective credit and collection practices.

Collecting delinquent money is the least fun of any aspect of the construction business. What follows is a multitude of advice from various sources on effective credit and collection practices. The information is organized chronologically from pre-credit approval all the way to last-ditch collection efforts.

Ounces of Prevention

• Accept credit cards. The advantages of credit cards outweigh the modest fees you pay the issuers. Number one is that credit risk is borne entirely by the card company.

• Subscribe to a credit reporting agency, whether one of the big national firms or a local one. For less than $100 a month (depending on amount of use), you can get a computer terminal installed for instant access to credit reports. This can save a lot of grief with big jobs. Look in the Yellow Pages under “Credit Reporting Agencies.” This step is useless, however, if you refuse to be selective about who you work for. Too many roofing contractors think the purpose of being in business is to line up work. The real reason is to get paid and make money.

• Prevent payment disputes before they happen by setting up a system to verify that invoices are accurate, delivery has occurred and work was done properly, before the bill goes out.

• Target real people. Mail invoices to specific individuals, not to companies, titles or “to whom it may concern.” Poorly targeted bills can get shuffled around for days before reaching the right person.

• Define your terms. Don’t assume everyone understands your payment terms. Explain them verbally and make them prominent on sales and work documents.

• Avoid the trap of treating all customers like friends deserving special consideration. Even if you socialize with them after hours, your obligation is to provide quality work and service, theirs to pay you on time.

• Later the payer, earlier the inquirer. Make a “customer service” call to chronically late payers the day their orders go out. “I just wanted to let you know your bill has just been sent out. Can I speed up payment by sending the invoice to a particular person?”

On-time Incentives

• Wield carrots and sticks. Be sure to consider the persuasive power of discounts on one hand and interest penalties on the other. People with cash flow problems tend to pay these bills first.

• Send invoices immediately. Get them out the day work is completed. Many contractors create their own cash flow problems by not mailing invoices for weeks after the job. Then the customer assumes he has 30 days to pay from date of receipt. After all, if you don’t show any sense of urgency in sending out the bill, why should the customer think he needs to hurry up and pay it? This is why 45-60 day payment periods became the industry norm.

• Shorten pay periods. Where is it written that you must allow 30 days for payment? Credit card companies typically give 15 days from date of billing. Some say “payment due upon receipt.” Most clients will probably ignore the directive, but at least you’ve established your policy. You might be able to make shorter terms acceptable with a 2 percent discount.

• Track receivables. Get some computer software that automatically tracks and ages receivables. It’s important to know the age of your receivables. If big chunks of money are owed more than 30 days, get moving on it. If big chunks are beyond 60 days, you’re in heap big trouble.

Collecting Overdue Bills

• Send letters with bills. An invoice alone conveys no urgency. Be firm but polite with your early collection letters — i.e., “Our records show your payment is past due. Please notify us immediately if our information is wrong or if there is a problem with this transaction. Otherwise, we request immediate payment.”

• Phone calls are more effective than letters. This is especially true if you call customers within a day or two after they become overdue. It lets them know you are fussy about getting paid and likely to keep pestering them.

• Keep pestering them. Make phone calls or send out reminders twice a month rather than every 30 days. As accounts age, increase the frequency and urgency of your calls and letters.

• Power up notices. Each successive letter should be tougher in tone. Show that you mean business. Use a form with “SECOND BILLING” imprinted in large red letters across the top. This conveys a sense of urgency to late payers.

• Some collections professionals swear that tough-sounding names get better results. So tell credit manager Morty Wimpenstein to use a pseudonym such as “Dirk Savage” or “Rocco Samson.”

Of course, you need to use discretion in badgering people. It’s one thing to act tough with a large, impersonal corporation, but you can’t step on toes of people you want to work for over and over. On the other hand, do you really want to continue working for people who have to be badgered to pay their bills?

Long-term Delinquency

Frankly, I lack enthusiasm to give much advice about collecting long overdue bills. This is closing the barn door after most of the horses have run away.

Beyond 90 days, your chances of collecting money owed diminish drastically. You can file liens, hire a collection agency or sic a lawyer on the deadbeats, but these acts of desperation leave you with less than full value on the dollar — if you collect at all. Sometimes you just end up throwing good money after bad. Better to focus your attention on preventing long-term delinquencies.

Collections professionals have found that most customers who pay late are habitually delinquent. One study showed that if a customer goes beyond 60 days past due, there’s a 62 percent probability it will happen again. If that customer goes beyond 60 days a second time, the probability is 95 percent he’ll always pay beyond 60 days.

The study also found that two-thirds of accounts that go past 60 days will reach 90 days past due. Also, when an account gets beyond 90 days, 87 percent will require the efforts of an outside agency to collect.

Some people who habitually pay late just can’t manage their finances. Others see it as a financial strategy to shore up their own cash flow.

One thing’s for sure, though. Money in hand is worth more than a check in the mail.