Block the Path of Least Resistance

Retrain the on-again, off-again payer
by Joseph Sullivan

On-again, off-again payers are generally following the path of least resistance when it comes to managing their finances. So unless a negative impact on cash, extra collection costs, and carrying costs are of no concern to a distributor, it had better not be a part of that path. For these customers, behavior modification is necessary. Of course, electrical distribution is about sales, and many distributors fear that an effective credit department will become a sales prevention department. This is why most prefer to try harder to maintain relationships than to get paid – an attitude that has crippled or killed a good many.

A quick look at where a company stands in the credit pecking order puts the entire situation into perspective. Developers and contractors tend to be credit intensive: They use or abuse every source of funds available to them. Their “alpha” creditor is the bank – but the bank has teeth: written notes, usually backed up by collateral and formally perfected by means of UCC-1 filings. Employees also have teeth: They must be paid or they won’t come to work. The utility companies have teeth as well: Pay up or they’ll shut off. All of the groups that get paid regularly have teeth.

Distributors have teeth too: They have the power to cut off shipment, demand dual-payer checks, or take out liens. They also have the ability to reach the customer in person or by phone. And while distributors have teeth, using them has consequences that must be weighed and balanced.

The good news is that customer behavior can be trained and modified. But to be effective, the creditor must reach out very quickly – a day or two after payment was expected. The more time that passes, the weaker the creditor’s position in the customer’s mind.

When a customer is “x” days past due (and not very many at that), he or she gets “touched.” The touch can be as soft as a friendly email inquiring as to issues and problems, but it must be unmistakably an inquiry about getting paid. An escalating series of touches – still friendly but increasingly firm – should follow, without much time between them.

A typical series would be an email on day two, followed by a phone call two days later, with a firmer email a couple days after that, and a personal visit when payment is a week late. When it is more than a week or so into the process, the tone must change. With a still-friendly attitude, let the customer know that if there isn’t a satisfactory resolution (payment, note, time pay promise – something concrete), restricting access to materials or taking other more serious actions will be considered. When all else fails, take the more serious actions.

So the keys to credit tough love are drawing a firm line; fast and frequent touches; maintaining a friendly attitude throughout the process; and consistent, predictable, and escalating response.

Taken together, these are reasonably effective behavior modification tools. They make it less convenient for the customer to view the creditor as an unpaid “bridge” of last resort.

Of course, it is a different matter if the customer really needs a bridge and is willing to offer something of value in return (purchase commitments, fees, etc.). In such a case, make a business decision to take the risk based on the potential gain. But few sporadic payers will go to such lengths. Those that don’t are picking the low-hanging fruit, the easy credit, the one they don’t have to pay this week. The creditor’s job is to modify that perception.

Joseph Sullivan and his colleagues at JSA help electrical distributors improve profitability and maintain growth. Reach him at joe@joseph-sullivan.com.

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