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Pamantasan ng Lungsod ng Maynila

PLM Business School

A.Y. 2020 – 2021 First Semester

FIN 3104: CREDIT MANAGEMENT AND COLLECTION POLICIES

MODULE 4: Collection Development and Management

CHAPTER 11: Collection Policy and Procedure

Learning Objectives

● Identify factors and strategies to consider in the formulation of credit policy.

● Explain how to minimize problems associated with accounts receivables with efficient collection
procedure and execution.

Topic Outline

I. Collection Policy

a. Elements of Collection Policy

b. In-House vs. Outsourced Collections

II. Classification of Debtors

a. Types of Debtor

b. Paying Habits

III. Collection Procedure

a. Collection Function

b. Collection Department

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I. COLLECTION POLICY

What is a Collection Policy?

A credit collections policy is a document that includes “clear, written guidelines that set the terms
and conditions for supplying goods on credit, customer qualification criteria, procedure for making
collections, and steps to be taken in case of customer delinquency.” (O’Brien, 2017).

In fewer words, it is a guide offering an organized and repeatable philosophy on selling on the
rules, regulations and procedures to manage daily operations. The goal for a credit collections plan is to
clearly define these elements so that sales and collections employees conform to documented steps and
procedures designed to optimize your resources, reduce credit risk, and improve overall cash flow.

Why is it important to have a credit collections policy in place?

Along with cash and inventory, accounts receivable is one of the most important short-term assets
a company has. The more predictably and effectively you can convert your A/R, the healthier your cash
flow will be. One of the most important factors in effectively collecting the money owed to you is through
consistency. By having a formalized plan that your employees follow and by documenting all steps and
communications along the way, your team will be much more consistent, effective, and efficient in
collecting outstanding A/R.

A well written and comprehensive credit collection policy will:

● Ensure continuity in the department in the event that key personnel leave the credit department.
● Help make sure all customers are treated fairly.
● Ensure consistent credit decisions are being made.
● Be used as a training tool for new sales associates and the credit and collections team.
● Be used to ensure consistency of procedure and execution between the credit department, sales,
and management.

Your policy can be as general or as specific as you would like, just keep in mind that in order to
protect your cash flow, arming your employees with knowledge and predefined best practices and
procedures is best so they always know what to do in certain situations and can react quickly and
confidently to resolve any problems or answer any questions.

Goals of a collections policy

The purpose of having a collections policy in place is simple – to protect accounts receivable.
Efficiently collecting payment on current accounts receivable and past-due accounts while maintaining
positive customer relationships is the main goal of the collections department.
The first step is deciding to create a written collections policy if one doesn’t already exist. Some
companies, especially smaller ones, may have never thought about having a formal policy in place if credit
and collections are handled by one person. Or perhaps a business that never had a formalized policy has
now decided to document the process in order to avoid ambiguity and a risk of bad debt. Consult with
your company’s legal department as to the best approach for your business.

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On a practical level, businesses should be proactive with collections and transparent regarding
goals and expectations. A thorough collections policy should embody these goals and expectations.
Common goals of collections departments include:

● To have your Collections Effectiveness Index (CEI) be at a defined number or higher

● To have your Days Sales Outstanding (DSO) be at a defined number or lower
● To reduce your bad debt by a targeted amount
● To reduce the number of invoices sent to a third-party collections’ agency
● Whatever goals an organization decides to include in its collections policy, they must be consistent
and attainable, and should aim to improve the quality of work performed by their collections
professionals.

A. ELEMENTS OF COLLECTION POLICY

Seven Elements of a Collection Policy

The following elements form the structure of a sound collection policy insofar as agricultural loans
are concerned. They do not represent merely a theoretical concept but are the experience of those engaged
in the operation of rural credit institutions in a number of countries around the world, more particularly in
the Philippines.

1. Collection is made easier, when the credit extended is a package of three things: credit, supplies,
and knowledge. If one of these is missing at the time of the submission and approval of the farmers’
loan application, or if it is of inferior quality or inadequate, the embryo stage of collection
commences at this time. Credit should not be extended for production that does not have a
reasonably assured market.

2. Another major element of a viable collection program for rural credit is “timing.” The farmer
operates within a critical season of constraint and timing for him is very crucial. Unless credit is
available for inputs, seeds, etc., at the proper time, it is of no use or will be misused.

3. Be selective of your clientele. In many cases, the old concept of extending credit based on worth,
assets, etc., is perhaps the most assured method of collection. However, experience in many
countries reveals that if sufficient care, counselling, and supervision are applied, a farmer who has
a good reputation as a community citizen is unlikely to lose that reputation and become a collection
problem.

4. Employ well-trained credit technicians. It is obvious that a title alone does not make a person a
good credit technician. It goes without saying that they should be trained agricultural graduates,
and in addition to having technical knowledge about the input-packaged ingredients, they should
be well versed on the bank’s objectives, lending programs, policies and procedures, so that they
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can be true ambassadors of the bank in the rural area. Their performance might be rated to farm
production and collections. The technicians should have adequate ability since supervision and
contact calls for numerous visits to barangays and a technician’s work should be 80% in the field
and 20% in the office. Small farmers like doing business in the field, and repayments can be
effectively made in this manner.

5. Maintain a continuity of the human-relationship once established. This is the most vital link in a
good bank-client relationship.

6. Tell the story of your bank to your community at every opportunity. Some rural banks in other
countries even publish a monthly bulletin which gives personalized information about the bank, as
well as producer and consumer hints, local news of interest, etc. These are rural banks with a future
inclined to growth, and loan collections that involve court cases or lawsuits form only a small
percentage of the total collection picture.

7. The final element of a sound collection policy, if the other six have failed, is to admit you have a
collection problem in your hands. Single out the delinquent individual and take legal action to
recover your funds, as well as those which belong to others in the form of savings or the Central
Bank as special crop production loans.

Deciding on a Collection Policy

Once the decision has been made to formalize a collection policy, it must be decided whether the
policy will be formulated from scratch or whether the disparate pieces of the current collection structure
can be melded into a cohesive outline.

Just like a comprehensive credit policy, a collection policy should not be an off-the-shelf or one-
size-fits-all product. Each individual business will likely want to treat the collection policy in a different
way – some are much quicker to send a sternly worded letter or firm phone call upon late payment, whereas
some will let the account simmer for a short period of time. As with many things in life and business, a
moderate approach that balances the reality of the market with the need to get paid according to the terms
of the credit extended is likely the best solution.

Strict adherence to the collection policy is generally best to streamline collections efforts and
exercise oversight of the decision-making processes. That does not mean that all clients must be treated
the same under the collections policy. Clients with an established relationship, for example, may be
extended the courtesy of an extra phone call or a couple of letters before the account gets placed with an
outside collection firm. Business relationships can easily sour over something like sending a delinquent
account to an outside collections firm so that knowledge is important in the crafting of a proper policy.

Keeping Your Credit Collections Policy Up to Date

Once you’ve developed your collections policy, it is important to update it regularly and make sure
it is still relevant and effective. It is recommended that this be done once every year, but a recent survey
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from Credit Today revealed that nearly 50% of companies are reviewing their policy far less frequently.
Some of the major points from the study include:

- 19% said they review and adjust their policy every 2 years.
- 13% said they review and adjust their policy every 3 years.
- 15% reported they only review and adjust their policy when they need to.

Credit Collection During the Pandemic

Collection policies are not a one-size-fits-all thing as the business landscape across many industries
have been rapidly changing. It is advisable to review guidelines and procedures periodically so that they
change with the times. Considering current economic conditions, businesses should consider a more
suitable approach to their collection management. Revising collections strategies to acknowledge an
uncertain environment and to create more transparency for both customers and collections team members
is vital in protecting accounts receivable and maintaining stronger customer relationships.

B. IN HOUSE VS. OUTSOURCED

The first part of any collection policy is generally in-house. The question is whether or not the
collection policy should keep the whole process in-house, or if it should eventually be outsourced, and to
determine when that point comes.

Of course, things like making a nice phone call before the payment is due in an attempt to ensure
prompt payment, and even a stern letter after the debt becomes due can easily be handled in-house.
However, there are certain things that an outside collection company can do that would strain the time or
resources of many businesses.

Outside debt collection agencies can be beneficial for several reasons, including their experience
specifically in debt-collection, notifying the debtor that the company has escalated the debt collection
process, spending time and resources to continually contact the debtor with letters or phone calls and
responding to and locking down promises to pay, reporting the debtor to credit bureaus, and more.

In House Collection Procedures

The fundamental rule of sound receivables management is to minimize the time span between
the sale and collection. Any delays that lengthen this span cause receivables to build to unnecessarily
high levels and increase the risk of uncollectible accounts. This is just as true for delays caused by your
billing and collection procedures as it is for delays caused by the customer.

1. Invoices
Proper collection procedures begin with invoice preparation. Invoices should be prepared
promptly and accurately. Promptness eliminates one possible source of delay. Accuracy prevents those
delays that occur when the customer disputes the invoice and returns it for correction, triggering a chain
of events that is time-consuming and often costly.
Invoices should clearly state payment terms. Is payment due within 10 days? Thirty days? Are
the days measured from the receipt of goods? Receipt of invoice? End of the month?

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2. Cash Discounts
When selling to large accounts such as commercial, industrial, institutional, and governmental
buyers, collection is often accelerated by the offer of a cash discount. The discount, usually 1% or 2%, is
offered for payment within 10 days. Most large organizations take advantage of all such discounts. In so
doing, they can sharply reduce your commitment of capital to accounts receivable. If your competitor
offers cash discounts, it may be necessary for you to include the same provision to maintain your
competitive position.
3. Specifying Payment Terms
Payment terms normally include discount terms and dating terms. Discount terms describe the
discount available, if any, for prompt payment. Dating terms specify the time when payment is due.

4. Special Conditions
Large accounts often specify certain requirements for invoice preparation. They may require
reference to a purchase order, proof of delivery, or a certain number of copies. Be certain that these
conditions are met when the invoice is first prepared and submitted in order to avoid delays and
duplication of effort.

5. Statements
To keep customers advised of their account balances, monthly statements should be submitted to
all open accounts. The statement should summarize the amount owed and any activity in the account
within the month.

Your choice of payment terms will often depend upon customary practices in your business. In
order to stay competitive, it is often necessary to offer payment terms that are equivalent to those offered
by your competitors.

6. Delinquency Charge
In some businesses, a delinquency charge for late payment is used to discourage customers from
allowing their accounts to become long past due. The delinquency charge normally involves a finance
charge or service charge of 1% to 1.5% per month on all balances more than 30 days past due.

7. Follow-up
The best time to initiate pursuit of outstanding balances is immediately. As an account gets
further behind, the balance often increases, while the chances of collection decrease. The person who
owes a few hundred dollars today is not likely to be in better shape to pay next week or the week after
than right now. Now is the time to start enforcing a rigid collection policy, making whatever
arrangements are necessary to be sure that you receive the money due to you in a reasonable period of
time.

Many businesses are reluctant to enforce strict collection procedures. The reasons for this are
several, and none of them are valid. Some people simply are embarrassed to ask for money even though
it is owed to them. Others express concern that they might alienate a "good customer" and perhaps lose
an account. The opposite is true. How good is an account if the bills are not paid? Even more important,
the customer owing you a large balance may be reluctant to do more business with you until the account
is cleared. You have not only lost your money, you have also lost a customer.

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8. Collection Follow-Up
Whether or not your business chooses or 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.

Second Collection Letter - A second letter, 30 days later, might read as follows, if no response has
been received from the customer.

Third Collection Letter - If the second letter is unsuccessful, a stronger letter should be sent in 30 days.
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?"
"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.

EXTERNAL COLLECTION RESOURCES

If your own collection efforts fail, there are two courses of action that are left to you - the
collection agencies and the courts.

1. Collection Agencies
Collection agencies are businesses established to collect past-due accounts receivable on behalf
of creditors. The primary advantage that collection agencies offer is their superior knowledge of
persuasive collection techniques. Additionally, creditors are usually anxious to clear invoices referred to
collection agencies rather than further damage their credit ratings.

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The collection agency's fee is usually based upon a percentage of each account collected. The
percentage ranges from 25% to 50% depending upon the size of the account or the total dollar volume of
accounts referred to the agency for collection. This approach, while often effective, can be expensive.
A business is committed to paying the agency's fee on any account referred for collection,
whether payment is made to the agency or to the business. Although some creditors may resent making
payment to a collection agency and prefer to pay the company directly, the company is still committed
to pay the fee when the account is collected.
2. Courts
If the collection agency fails, your final recourse is through the courts. The matter may be
resolved in a small claims court if the amount owed is small. For larger amounts, you may have to file
suit to collect. In either case, you are faced with a costly and time-consuming procedure.
The best way of avoiding these time-consuming, costly procedures is to take prompt, strong
action on your own as early as possible. In the long run, you will be doing not only yourself a favor but
also the creditor. While your creditors may be unhappy at the time, you will have spared them costs,
time, and the loss of their credit ratings.

However, the cost associated in using an outside collection agency compared to attempting to
keep the process completely in-house should be taken into consideration when deciding what method to
use.

II. CLASSIFICATION OF DEBTORS

Collection efforts are not intended for those who pay their obligations promptly and religiously.
Rather, they are directed to those who take time to pay - the slow-payers. More so to those who try to
avoid meeting their obligations if they could. For this reason, many business firms classify their debtors
into certain types for purposes of ensuring a sound policy and an effective collection procedure.
● Types of debtors
● Paying habits

A. TYPES OF DEBTORS

While all debtors who are unable to pay their obligations on time may all be lumped up under
the broad class of delinquents, nevertheless, they may be fur-ther classified and distinguished according
to the attitudes and behavior they manifest and display. Briefly, they are:

1. The cooperative debtor

Some debtors become delinquent not necessarily out of their own making nor to their
liking. In some instances, such is brought about by circumstances beyond their own control -
circumstances which conspire with one another as to make the settlement of existing obligations
difficult, if not impossible. For instance, unexpected contingencies like prolonged illness of a
member of the family and the like may have caused a heavy drain of funds thereby resulting in
some dislocation in the family budget, at least for some time. Where such is the case, the debtor in
a gesture of cooperation may go out of his way to enlist the help of the creditor for a grace period
in an effort to be able to pay his· obligations eventually and thus main-tain both his self-respect

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and reputation as well. This type of debtor will not hesitate to settle his financial obligations as
soon as he is provided with the opportunity to do so. As such, he is a good moral risk.

This individual and others of his kind not infrequently pass sleepless nights trying to find
ways and means by which they could discharge their obligations soon, if not soonest. Given time
they do not constitute much of a problem to bill collectors.

2. The chronic complainer

It is not uncommon for creditors to be the recipients of repeated but nevertheless baseless
complaints from debtors for this or that grievance which are generally the products of their fertile
imagination. In some instances, they are the by-product of forced habits. They do not feel happy
unless they are able to air certain grievances or complaints, fabricated, flimsy or otherwise.

In other instances, they are designed to serve as a smokescreen for their failure to meet
their obligations on time. Complaints may range from petty to absurd, such as poor service on the
part of the creditor company, defective merchandise, to so-called " over-pricing" of the goods and
others.

A local clothes manufacturer who for years has been exporting his goods abroad cannot
help but unburden himself to a friend of his to the effect that one importer of his based in the
United States took more than half a year to inform him that the quality of his products is below
acceptable standard and hence, he was shipping them back to the exporter in the Philippines. Why
did it take the buyer more than half a year to discover the "fact" that the goods in question were
not of the right quality? the exporter asked his friend. By way of explaining the situation, the
exporter believes that, after so many months and the' market conditions in the country of
importation has not appreciably improved, the importer found the allegation of "poor" quality as a
good excuse for him to return the goods.

Of course, it cannot be denied that some complaint; are legitimate and therefore must be
listened to and acted upon promptly if the company is not to lose its customers.

3. The politician-type
This type of debtor does not deny the existence of his obligation which arose from the
previous transaction of his. Neither does he shun away from the presence of bill collectors.

However, like the politician, this type of debtor has a number of reasons kept under his
sleeves which explain one way or the other why he cannot pay on time or should not pay at least
for the time being. Hence, the necessity for postponement in the settlement of the obligation.

As a practitioner of public relations, he makes the collectors feel that they are welcome at
his place. In fact, he always has a ready smile and a warm handshake for the creditors or their bill
collectors. In some instances, he treats them with an offer of a cup of coffee or the like. No wonder,
in a number of instances, bill collectors return back to their offices empty handed since they feel
awed and thereby could not pursue their mission of collection for their employers as with vigor
and determination.

4. The uncooperative and indifferent debtor

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This type of debtor does not pay on time, not because he cannot pay but rather because he
finds it difficult to part with his money. The Tagalogs have a word for this kind of individual. He
is “makunat” which in English is synonymous with “stiff” or hard.

Such debtors are not concerned with what society or their fellow-beings think of them.
Their reputation and names are at best secondary to them. What is important to them is money
which to their minds are the “be-all” and “end-all” or everything in the society where they live.

5. Paranoiac
Some people feel on top of the world even when their world is crumbling to pieces. They
suffer from delusions of grandeur. Psychologists call them paranoid.

Claiming close association with influential, powerful, and affluent individuals, their trade
is the art of name-dropping. At times, they make it appear as if they are wallowing in wealth
although in fact, they are hard up. They enjoy talking about their wealth, their power, their affluent
ancestors, and everything that will help to inflate their ego. They keep on promising that they will
settle their obligations although the question that remains unresolved is: When?
Sometimes, they claim that their secretaries are not around so nobody could prepare the check.

This type of debtors needs to be made to feel important and moreover put into good humor
by inflating their egos in order to induce them to pay soon, if not soonest.

6. Belligerent or pugnacious type

Just as there are individuals who think that society owes them a living, so it is equally true
that there are those who think they are entitled to the use of credit regardless of their poor credit
standing. How, these individuals were able to obtain the use of credit in the first place is very
baffling indeed.

This type of debtors whenever reminded of their existing indebtedness always exhibit an
air of defiance. They become haughty and arrogant. Always in a belligerent state of mind, it is not
uncommon for them to hurl brickbats to their creditors and moreover challenge the bill collectors
to a fist fight- a mentality and behavior reminiscent of the days of the old frontier when might was
“right”.

Some of them are irked to see the presence of bill collectors in their premises. To drive as
well as scare them away, they let loose their dogs so as to chase said bill collectors whom they
consider as intruders.

7. The elusive type

Some debtors are as elusive as an eel. It is hard for bill collectors to find them in their
offices or in their homes.

Many of them maintain two doors, one to gain entry- and the other as an exit without being
detected by those who are waiting for them. They generally leave their homes very early in the
morning and come back late at night. In the office, callers are screened for obvious reasons. For
those who can well afford, they are surrounded by a cordon sanitaire.
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B. PAYING HABITS
Another way of classifying debtors is according to their paying habits, that is, upon their
promptness in meeting their obligations. They are:

1. Prompt payors
This group consists of individuals and business entities that are conscious of their financial
obligations which they discharge promptly without the need of being reminded about them. Such
individuals and business entities are those of proven probity and possessing high integrity and thus, they
require minimal attention, if at all, from the collection department.

They are rated as good, if not excellent risk. They continue to enjoy such good ratings until there
is evidence which not only casts doubt on their credit standing but proves the contrary.

2. Delinquent debtors
A delinquent debtor is not merely a poor prospect for further business. He is no prospect at all. He
will shun the creditor, if only from a sense of personal embarrassment. Moreover, once he becomes that
involved financially, he is all too likely to go from bad to worse as a credit risk. The job of the collection
department is to catch him in time to get him back on the rails, at the same time restoring his potential as
a future customer by restoring his confidence in himself to pay his obligations if he only tries hard enough.

At this point, let us consider the types of delinquent debtors or borrowers and the widely divergent
handling problems they present. In brief tabulation form and as presented by Borroughs Clearing House,
they are:

1. Fair credit
a. Careless borrower - merely needs reminding regularly.
b. Complainer - he has grievances after he falls behind.
c. Unforeseen problems - unemployment, shrunken income, medical expenses.
2. Slow credit
a. Poor manager of his finances, over-indebted.
b. Marital problems - may quit his job, skip, or hit the bottle.
c. Coward - afraid to face the creditors.
3. No good credit
a. Lives beyond his income. Credit passed unknown.
b. Gypsy - in residence or employment.
c. Crook - directly attempted to defraud.

III. COLLECTION PROCEDURES

The set of procedures that a company defines for their collections team to follow will be the core
component of its collections policy. They should be practiced consistently and should aim to apply to all
customers – but should also be flexible when the situation calls for it.

Collection procedures can not only outline steps to collecting on delinquent accounts but also
include steps to preventing accounts from becoming delinquent. Providing new credit customers with
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terms of sale and payment information and including this information on credit receipts and statements
can serve to remind customers of their credit obligation.

In-house collections procedures should include a schedule for contacting customers with past due
accounts. A business can, for example, send a past-due notice and start making weekly collection calls
when a payment becomes seven days late. If payment is not received, calls can become more frequent. If
the customer is still past due at the end of 30 to 90 days, the business can then refer the account to a third-
party collection agency or consider taking legal action.

Generally, a collection policy states the steps to be taken to recover amounts due prior to litigation,
which typically includes:
1. When customers should be contacted
2. How they should be contacted, how disputes are resolved
3. When internal or external “collectors” are used to step-up collection efforts
4. When and whether to turn the account over to litigation or write-off the debt

This step-by-step process begins when an account first becomes past due. The process needs to
continue until payment is collected, turned over to a third-party collection’s agency, or written off as bad
debt. The policy should include account prioritization and clearly defined timeframes for contacting
customers and escalating issues, strategies to be used, and tone and behavior to be exhibited throughout
interactions with customers and internal departments.
An important consideration to keep in mind when defining your company’s collections procedures
is the size of your organization. Smaller companies often have tighter profit margins and can be
catastrophically impacted by delinquent accounts. These risks should be reflected in the steps of your
collections process, such as by tightening timelines of customer contact and escalation to senior
management, in order to closely guard accounts receivable and optimize your cash flow. On the other
hand, larger companies that have access to greater sources of capital may implement a more relaxed
collections policy, concentrating more on the customer relationship and future business than on shorter
time frames for collecting payment.

Below are sample guidelines to help build a company’s collections process.

(Timelines and strategies can be customized to reflect different levels of risk with respect to both
the company and the customers.)

1. When to Contact Customers

● Days 1-3 past due: Confirm invoice was sent, confirm there are no disputes, and send automated
email reminders including account statement.
● Days 4 -7 past due: Contact customer by phone and/or email attempting to secure payment. Ensure
any discrepancies or disputes have been resolved.

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● Days 8-14 past due: Send second automated email and follow up with a professional, scripted phone
call. Notify the sales representative that payment is now one week late.
● Days 15-30 past due: Send third automated email stating account will incur late fees after 30 days.
Follow up with a phone call to confirm receipt and remind customers of late fees.
● Days 31-45 past due: Mail letter on company letterhead stating payment is now 30 days late. Apply
late fees to account.
● Days 46-60 past due: Begin calling and emailing customers every 3-5 business days. Place the account
on credit hold and notify the sales representative and customer of credit hold.
● Days 61-90 past due: Notify senior management and prepare to send an account to collections agency
and/or legal counsel and/or write off as bad debt.

2. How to Handle Disputes

A comprehensive collections policy should include guidelines on how disputes and discrepancies
should be handled. Before initial contact with a customer, the collections professional should ensure that
any internal issues are cleared up. These might include unapplied checks, unused credits, or any special
terms offered by the sales representative but not applied to the account. If a dispute arises during
interactions with the customer, handle it quickly to avoid slowing down the receivables process. For
example, if you wait a week to send the customer a corrected bill, you’ve just put off getting paid by a
week.

3. When to Send Accounts to Collections Agencies

When all internal means of collecting on a past-due account have been exhausted, some companies
choose to turn the delinquent account over to a third-party collections agency. A collections agency is a
company used to recover funds that are past due or from accounts that are in default. This step in a
collection process usually occurs when the account is 60 or more days past due.

There are several factors that influence a company’s decision to turn past-due accounts over to a
collection’s agency. One factor is the company’s risk tolerance for bad debt. If positive cash flow would
not be greatly impacted by a certain level of bad debt, a company may choose not to outsource collections
efforts. On the other hand, a company with tighter profit margins would likely be more risk averse and
may set forth in their collections policy the transfer of past-due accounts to a collections agency at a
designated number of days past due.

4. When to Write Off Bad Debt

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If it has been determined by the collections team, in congruence with the collections policy, that
the debt has become worthless (because it can’t be collected), then it can be written off. Writing it off
means adjusting your books by removing it from the accounts receivable balance so that it is not
represented in the total amount of your current accounts.

Instruments of Collection Method and Procedures

1. Statements. The first step in any collection system always consists of mailing a statement to all
debtors as minder that their obligations are due and payment is expected.
2. Collection letters. It is the most commonly used method after the account has passed the
“statement stage”.
3. The personal call. Probably the most common method of collecting overdue accounts.
4. The use of telephones. The advantages of a personal collector can be obtained, and the
disadvantages overcome by the use of telephones.
5. The use of a registered mail. If the collection letters sent to the debtor by regular mail are not
answered, a registered letter may be used effectively.
6. Attorneys and collection agencies. After the means have been exhausted, and the creditor is ready
to cut his business relations with the delinquent debtor, a letter is sent to the debtor threatening to
place his account in the hands of an attorney or collection agency unless payment is made within
a specified time.

A. THE COLLECTION FUNCTION

Banks and other lenders as well as independent collection agencies perform credit collection
functions. A variety of collection functions can be used in recouping outstanding debts from consumers
who have fallen behind in their payments. Each company follows its own business model, collecting debts
using a variety of strategies, but the method must follow the requirements of the Fair Debt Collection
Practices Act.

Fair Debt Collection Practices Act (FDCPA)

The Fair Debt Collection Practices Act (FDCPA) is a federal law that limits the behavior and
actions of third-party debt collectors who are attempting to collect debts on behalf of another person or
entity. The law, as amended in 2010, restricts the means and methods by which collectors can contact
debtors, as well as the time of day and number of times contact can be made. If the FDCPA is violated, a
suit may be brought within one year against the debt collection company as well as the individual debt
collector for damages and attorney fees.
❏ The Fair Debt Collection Practices Act covers when, how, and how often a third-party debt
collector can contact a debtor.
❏ In some cases, a debt collector can work out a payment plan or settlement to help a debtor pay
their bill.
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❏ If the FDCPA is violated, a debt collector can be sued in state or federal court for damages and
legal fees within one year of the violation.

● Organization
An organization designates the credit collection function to be either centralized or
decentralized. The key to this function, whether branches or a central office perform the function,
is standardization. Inside the company, the credit collection management team adopts specific
procedures to collect payments from borrowers pursuant to their individual situations.

● Controls
Collection functions must include built-in controls. An organization adds controls, such as quality
control monitoring of debt collection phone calls and correspondence and supervisor approval of payment
plans and settlements, to ensure consumers are treated appropriately. Under the Fair Debt Collection
Practices Act (FDCPA), consumers are protected from debt collector practices that are deceptive, abusive
or unfair. When you are contacted by a debt collector, you should keep notes and ensure that the specifics
of this contact do not violate your consumer rights under this act.

● Phone Calls
Most debt collectors use phone calls to attempt to collect debts. Even small business owners must
use practices to get unpaid accounts current. As a consumer, you should know your rights regardless of
the type of company contacting you. Even companies not regulated by the FDCPA should follow good
business practices by not abusing or deceiving you during phone calls. You should not be contacted before
8 a.m. or after 9 p.m., and a creditor cannot call your line multiple times in one day.

● Handing Over Accounts

Lenders and companies, even small businesses, initially may try to collect debts from consumers
directly. After a certain amount of time with an unpaid balance, such as 90 days, 120 days or 180 days, a
business may decide to transfer an outstanding account to a credit collection agency.

Philippine Setting:

SEC Memorandum Circular No. 18 Series of 2019: Prohibition on Unfair Debt Collection
Practices of Financing Companies (FC) and Lending Companies (LC) - a memorandum circular
preventing unfair debt collection practices such as the use of insults or profane language, violent threats
or false representation.

“Financing companies, lending companies and third party service providers hired by them may
resort to all reasonable and legally permissible means to collect amounts due them under the loan
agreement provided that, in the exercise of their rights and performance of their duties, they must observe
good faith and reasonable conduct and refrain from engaging in unscrupulous and untoward acts,” the
SEC said in the circular issued Aug. 19.

Furthermore, the corporate regulator said that making contact at unreasonable or inconvenient
times or hours – before 6 a.m. or after 10 p.m. – is not allowed. This is unless the account is past due for
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more than 15 days or the borrower has given express consent that the said times are the only reasonable
or convenient opportunities for contact, the SEC said.

Financing and lending companies found to be violating the circular face penalties ranging from
P25,000 for lending companies and P50,000 for financing companies for the first offense to P50,000 to
up to P1 million for both for the third offense and possible suspension or revocation of their license.

The SEC issued the circular because it has been receiving numerous complaints against financing
and lending companies that allegedly harass borrowers and employ abusive, unethical and unfair means
to collect debts. It said the SEC has regulatory and supervisory jurisdiction over these companies by virtue
of Republic Act 8556 or the Financing Company Act of 1998 and Republic Act 9474 or the Lending
Company Regulation Act of 2007.

B. COLLECTION DEPARTMENT

A collection department is an internal department within a company staffed by specialists in

collecting past due accounts or accounts receivable.

The objective of the collection department is to manage all unpaid debt, such as invoices, debts
and debt recovery within a public body or private company. In order to achieve its objectives and defend
the interests of creditors, the collection department initiates a series of procedures such as sending couriers
and legal letters or even calls to establish contact with debtors. Other conflicts can also be managed by
debt collection employees such as problems concerning a lack of satisfaction with a product or service.

Collections department employees attempt to collect payment on overdue bills. Some work for
third-party collection agencies, while others—known as in-house collectors—work directly for the
original creditors, such as mortgage companies, credit card companies and hospitals. Collections
department employees must have good problem-solving and people skills. Collections department
employees are responsible for locating consumers or businesses with delinquent accounts and notifying
them of the delinquencies. They work with those consumers or businesses to arrange payment of past due
amounts or, in some instances, the return of merchandise. They have good investigatory skills and are
detail oriented. They also work well with people, which includes having good listening skills, problem-
solving skills and an ability to persuade.

Qualities of a Good Bill Collector

Just as the manager or a collection department is competent and capable, so must the men under his charge
be those who possess certain desirable qualities to be assets to their department in particular and to the

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company in general. Doubtlessly, they must develop every ounce of their mental, moral and physical
equipment in order to acquit themselves creditably to their task and occupation.

1. Industry. While industry alone does not guarantee the success of man in his undertaking, nevertheless.
it brings Commensurate rewards. As one writer said:

"The heights by great men reached and kept

Were not attained by sudden flight
But they, while their companions slept,
Were toiling upward in the night."

Edison put it very simply when he described success as 99% perspiration (meaning industry
and hard work) and inspiration.

To the individual who possesses this invaluable quality, there is no half-way measure.
Neither is there room for procrastination.

2. Persistence. Persistence is the twin brother of industry. A good bill collector is never tired and afraid
of making repeat calls until the amount owed by the debtor is turned over to the company. It takes
persistence to break down resistance, stubborn as it may be. Persistence is the nemesis of failure. Quoting
the words of Shakespeare: "Much rain wears the marble."

3. Tact. The job of a bill collector is both taxing and at the time a thankless one. To succeed, one must, as
much as possible, avoid offending the delinquent debtor while making the collection for the company, if
this is possible. Thus, he should possess tact — prudence and good judgment.

4. Resourcefulness. Good bill collectors have demonstrated quite aptly why they are a success in their
chosen occupation. Possessing many desirable qualities, one thing basic to their success is their
resourcefulness. This may be considered as synonymous with need for achievement, the so-called nACh,
for short.

Individuals who spare no time nor effort in making sure that they do their task well out of a desire
for achievement or a desire for fulfillment and not merely the desire for prestige or recognition cannot
fail. They may, as circumstances arise, succumb to temporary pitfalls and setbacks but, ultimately, they
generally emerge triumphant.

The reasonable possibility of failure on the part of such individuals induces them to be resourceful
and excites them to increased effort. Of failure, they look at them as temporary and as a natural part of the
game of life. The achievement-motivated individuals are very determined just as they are very resourceful.
They refuse to leave their tasks undone to uncertainty.

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While they do not always succeed, since in the case of bill collection, there are accounts which are
not only difficult but almost impossible to collect, however, they do not easily give up without trying.
Instead, they resort to ways and means by which they could succeed in the end.

The Collection System

While it is to be admitted that no single collection system can exactly fit the needs of every kind
of business, nevertheless, one that is expressly geared to the business enterprise that is flexible and
changing as needs arise should be devised and installed.

The collection system should be anchored on helping preserve the goodwill of its customers just
as accounts are collected when due from them. By establishing close rapport with its customers, collection
efforts should be exerted as to induce the customers to settle their accounts willingly on their own initiative
and thus devoid of the necessity of any reminder from the creditor company. While this is not always
possible, its attainment helps cement close relationships between the company and its customers.

Since no sale becomes complete until the money due is collected, there is a need for close
collaboration among the selling function, credit function, and collection function.

Management and the board of directors should periodically review the status of past-due loans.
Past-due loans subsequently renewed or paid at some later date should each be checked thoroughly to
insure that proper interest has been received. They should be closely supervised to effect collection or to
subject them to easy repayment arrangement with the borrower concerned. If conditions or circumstances
warrant, past due loans should be renewed or restructured.

Collecting Delinquent Accounts

Notwithstanding the extreme care adopted in the grant of credit, there are occasions when some
borrowers get into financial trouble and thus find it difficult, if not impossible, to discharge their
obligations. Indeed, the same laws of probability which govern the percentage of good loans also govern
the percentage of slow and troublesome loans.

When borrowers become placed under such a circumstance, one good and practical policy to adopt
is by maintaining a regular, continuous follow-up, keeping in constant touch with the borrower; trying to
be cooperative and helpful; and moreover, always bring courteous but nevertheless firm.

Also, for as long as the borrower responds in a spirit cooperation; as long as he tries to exert
conscientious efforts to pay his indebtedness rather than evading his responsibility, it is necessary that the
creditor must exercise some compassionate understanding with his debtor as circumstances would
indicate. But when the opposite is true, or when the debtor tries not only to avoid meeting his obligations
even if he could but also displays an air of arrogance, then, the creditor must avail and use all the resources
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and power under his command to collect, whether it be repossession, foreclosure or court action. It goes
without saying that laxity in collection would merely serve to invite more difficulties in collection and, at
the same time, helps convert potentially good customers into poor ones — poor for the creditor and poor
for everyone else who would extend him credit in the future. Even after a loss is established and a note
charged off, collection efforts should not stop. Indeed, it is a good collection policy to continue devising
ways and means directed towards the collection of receivables as long as there still appears some good
chances of collection.

One well-established financing company based in Makati, Metro Manila, in an effort to strengthen
its collection machinery, stipulates the following in its official receipt issued to acknowledge payments
made by its customers:

"This receipt is not a waiver of any right

or action that accrued or will accrue in
favor of this company by virtue of late
and/or incomplete payments."

Collection Department Procedures

1. Not all customers pay their bills without being asked to do so. This is the rationale for the existence of
a collecting arm.

2. The primordial responsibility of every collecting department is to bring in the money owed the company
with least costs and efforts.

3. It is imperative as well as sound practice to bill customers as soon as their obligations become due. This
will help reduce the required investments in receivables.

4. Collection efforts should be always in line with company policy: pegging down collection costs within
reasonable limits; preserving goodwill of customers; and minimizing risks.

5. In a very subtle and tactful manner, the collection department should be able to show to the customers
that it is to their advantage to pay their obligations to the company and thus avoid the attendant
embarrassment of court suits and impaired reputation.

6. Collection letters should be worded in a personal fashion and make customers feel that they are
important and moreover friends Of the company with whom they transact business.

7. Every collection effort should be properly recorded in the credit file so that a complete history is
available at all times and, moreover, kept up to date.

8. The collection department should periodically review its policies and procedures and evaluate against
results.
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Why Collectors Grow Gray Hair

In spite of the credit terms, that is, the period of time in which credit obligations remain subsisting,
as for instance, payment shall be made one week after delivery or 30 days, in accordance with company
policy, in a number of instances there is breach rather than observance of the agreement.

For instance, take the case of some stores which require their suppliers on a 30-day account to
present a sales invoice a week before the period is up in exchange for the counter receipt which is done
only on a Thursday. Collections from said stores are scheduled only on Saturdays which, needless to say,
is a non-banking day, and so is the following day. The counter receipt which is the basis payments to be
made is not processed till one week after. At best then, payment is made only after the lapse of five or six
weeks, if not more.

There are also certain other factors which tend to cause a further delay in the payment of the credit
obligation. It is not unusual for a bill collector to be told that the checks are ready but they could not be
released as yet, since the official authorized to sign the check is out of town or in a conference or doing
something The situation becomes compounded when holidays set in coinciding with the release Of the
checks as payments for the things ordered. As such, the sellers cannot make use of their funds immediately.

Collection Through Banks

For the convenience of the paying customers, a number of companies allow them to pay their
obligations through the facilities of certain specified banking institutions. Hence, said customers are
spared the trouble of paying a visit personally to the offices of the creditor companies to make their
payments. Payments for encyclopedias, real estate, insurance, and telephone bills are made and collected
through the banks.

It could be rightly assumed perhaps, if there is any company that is immuned from the presence of
any collection problem, which is the bane of most creditors, it is the Manila Electric Company, known as
the Meralco for short. In the event that the customer cannot pay his bills in spite of notices to that effect.
All that the company does is to cut off the electric wire and thus plunge the customer's home into a state
of darkness which many can not ill afford to suffer considering the fact that lighting is a basic necessity.
If ever a customer leaves without notifying Meralco of his whereabouts, his unpaid bills may be offset by
his deposits.

Those Who Could Be of Help

When customers turn deaf ears to pleas of collectors to settle their obligations, one method that
sometimes proves to be helpful is by contacting the wife over the telephone and appealing to her. The
telephone number is generally indicated in the application for loans. Many times, this proves fruitful since
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many wives make the budgets and pay the bills and moreover try to avoid suffering a damaged reputation
insofar as the family is concerned.

A letter of appeal addressed to the Commissioner of Civil Service in the case of delinquent debtors
employed in the government service could prove fruitful.

Benefits from Effective Collection Effort

Indeed, the benefits arising from effective collection efforts are many, but the most important ones
may be presented in summary form, as follows:

1. Reduction in the volume of accounts receivables

2. Freeing capital for carrying the business operations
3. Increasing profits through decreased expenses.
4. Shortening of credit period, and
5. Establishing a line of customers who are financially sound.

REFERENCES:

Bianca, A. (2019, January 10). Credit Collection Functions. Retrieved January 31, 2021, from
https://pocketsense.com/credit-collection-functions-7759091.html

Debt collection department. (2018, January 5). Retrieved January 31, 2021, from
https://www.tcm.be/en/debt-collection-department/

Gonzales, I. (2019, August 26). SEC issues memorandum on unfair debt collection practices. Philstar.
https://www.philstar.com/business/2019/08/26/1946404/sec-issues-memorandum-unfair-debt-
collection-practices

Miranda, Gregorio S. Credit and Collections 4th Ed. National Bookstore, 2002.

O’Brien, L. (2019, November 26). WHAT IS A CREDIT COLLECTIONS POLICY? Lockstep Collect.
https://anytimecollect.com/blog/credit-collections-policy/

Strategies for a More Effective Collections Policy. (n.d.). Dun & Bradstreet. Retrieved January 27, 2021,
from https://www.dnb.com/resources/collections-policy.html

What is A Collection Policy? (n.d.). Level Set. Retrieved January 30, 2021, from
https://www.levelset.com/blog/collection-policy-an-overview/

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