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Best Practices for Handling Missed Payments and Defaults

This is the sixth installment in our series, “Establishing Best Practices for Extending Credit in Today’s Economy.”

In our previous blog posts, we discussed getting organized to offer credit to your customers, best practices for processing credit applications and creating credit agreements, and ensuring payment.

In this blog post, we will focus on best practices for handling missed payments and defaults.

Strategies for Handling Missed Payments and Defaults
While automating the payment process using electronic debit to a borrower’s bank account greatly reduces the risk of payment default, missed payments still occur and can lead to loan defaults. So given that we followed best practices during the application process and are using automated payment processing, what steps are recommended for handling missed payments? Automated payments fail for a variety of reasons. Assuming payments are made via ACH, a payment may fail due to insufficient account funds a closed account . Generally, sending a payment reminder to the borrower prior to each payment due date will ward off these issues before they occur; but when they still happen, it is best to immediately contact the borrower to discuss the missed payment and agree upon corrective action such as an immediate payment to get back on track.

Taking manual payments to correct a missed payment forces the issue with the borrower. They have to respond to your request by either coming into your office with a payment, authorizing an immediate debit of their bank account, or providing you with a credit card for payment. If they decline to correct the situation immediately by seeking a delay in payment or declining to honor the payment agreement, you know that you have a more serious potential default situation. Even in these extreme situations, being able to restructure the terms of their original payment agreement with you might be the trick to avoiding a true default.

However, if it is clear that a default situation is occurring, it is best to immediately hand off that account to outside collections for processing. This provides two benefits to you:

First, delinquent accounts that sit unpaid for more than 30 days become uncollectable very quickly. Studies show that unpaid accounts that are 60 days or more past due have less than a 50 percent probability of being collected at all.

Second, it shows the borrower you “mean business” and often prompts them to agree to take action to correct the default situation. At this point, you should have established guidelines outlining what your business is willing to accept to resolve a default and who is authorized to offer this deal to the borrower.

For example, your policy might dictate that an email payment reminder is sent five days prior to the due date for a payment. If the payment is missed, a representative contacts the borrower by telephone to discuss the situation and resolve the problem. During this call the representative pushes for immediate payment via one of the accepted forms of payment.

If the borrower cannot make immediate payment to correct the default, an inquiry is made regarding possible special arrangements to correct both the current and possible future situations. These special arrangements might include restructuring the payment agreement to change the payment amount, changing the monthly due date, or in extreme cases, moving to settle the debt at a discount with one or two payments. Approval of any special arrangement would typically require someone other than the representative to approve the arrangement and also for the borrower to consent to the new arrangement in writing.

If none of the above actions corrects the default, the account should be sent to outside collections. However, the objective before taking this path should be to settle the debt at a lower overall cost compared to what could be expected using an outside collections service. Since each situation will be unique, multiple steps with associated escalation points should be employed to quickly filter payment problems to only those hard default cases.

Using an outside third-party service for both the soft collections and hard collections processes can be a cost-effective and efficient option for many businesses. Using a third party relieves your staff of the uncomfortable burden of handling collections and frees their time to do what they do best – serve your customers. Fees vary depending on the scope of services and the delinquency of the accounts involved. There are many options available, so it is best to shop around for a provider that understands your business, has a good reputation, and is competitively priced. Services, such as ExtendCredit.com, even include soft collections in the bundle of capabilities provided to their customers.

Effective Automation is Key Just like all the steps leading up to this point in the process, automation is key to ensuring the best results. Handling missed payments and defaults manually is time consuming, stressful, and risky. Automated payment reminder emails reduce missed payments. Effective automation to alert, list and manage payment issues keep needed visibility around the issue and organize the workflow involved in resolving these situations. Integration with outside collection services for hard default situations provides up-to-the-minute status updates regarding where those accounts are in the collections process and simplifies communications with the outside service provider.

A robust, easy-to-use system coupled with service provider staffing to conduct soft collections activity on your behalf provides a rich set of capabilities to maximize results even for a small business with limited staff.

In our final blog post on “Establishing Best Practices for Extending Credit in Today’s Economy,” we will summarize our best practice recommendations and discuss how applying automation to the full lifecycle maximizes your results from extending credit to your customers.

By | 2016-10-29T16:36:45+00:00 8:13 am|Comments Off on Best Practices for Handling Missed Payments and Defaults