Most mid-market companies understandably focus far more effort on sales than on their credit management. You may think the best way to bring in more cash quickly is to increase your sales; you’d be surprised how much cash you can find when you look inside your own credit department

In the last few years, during the recession, we’ve seen more mid-sized companies extending more credit to their customers, especially as banks are lending less. Your company isn’t set up to lend the way a bank does, and yet you may find yourself in a situation where customers are owing you substantial amounts of money that are 90 days or more past due. That might sound like very bad news, but there are techniques for turning that receivable into cashflow for your company.

One technique is to set up installment plan notes for repayment over a period of three to 18 months. We implemented this recently with a client who had been allowing some of their customers to pay whenever they wanted. In this case, nearly 100 customers owed over $1 million in bills aged 90 days or more. These customers had simply gotten in over their heads; most weren’t trying to dodge their obligations and wanted to continue to do business with our client.

We worked with our client’s customers to set up secured installment notes and allowed customers to pay down their debt at a scale that worked for them. For security, we filed UCC’s on the new notes in the event the customer defaulted, went into bankruptcy, or tried to sell the business without paying us.  With each customer, we discussed their budget to find the right amount of frequency and dollar amount for their recurring payment. The previous strategy of calling every week and obtaining small payments was frustrating for both sides.  No improvements were made as old balances were simply offset by new sales.   Our installment note plans called for new sales to be made on COD so the balances didn’t increase. 

As I write this, nearly 60% of that $1 million has been paid back to our client. Only 14% of the notes have gone into default. Setting up this system gave our client an extra $50,000 to $75,000 a month in cashflow. We implemented this system while sales were declining because of the recession, bringing in cash our client never expected to see. In addition, this plan allowed them to salvage relationships with many good customers who wanted to continue buying from our client but had been slipping further and further into debt.

I hope more mid-sized companies will realize the potential cash available to them through smart credit management practices. Your credit department doesn’t have to be a source for only bad news. With the right techniques, you can turn your credit department into a source of support for your business goals.