Delinquency

Delinquency is the first and most obvious signal that there is a problem with a loan. A missed or late payment comes with a reason; they all do. Some of those reasons are valid while others are red herrings. Regardless, they both must be worked out with your borrower.

Before you make that first contact regarding a late payment or an NSF item, keep this in mind. Your objective is not to merely collect the outstanding payment; your objective is to solve the problem.

You have to find out what is causing the problem. Perhaps your client will give you one of these responses:

• Forgot the amount due;
• The cheque is in the mail;
• Sent it on the due date, just like you said;
• Cashflow not so good right now;
• Bad timing;
• Can’t pay this time of year; or
• No money.

Getting into the "Why"

The discussion needs to focus on the root of the problem. The date the payment is due could be an issue. Many lenders have payments set to a fixed day every month for all borrowers. Some borrowers may have enough other debt payments due on the same day that it's tough to pay all of it at once. This can easily be corrected by adjusting the due date. Others might have seasonal issues. Revenues are better in some months, poor or non-existent in others. TEA's seasonal schedule will help you set up clients' payments to match cashflow availability.

Then there are the red herrings. Dealing with these needs to be done early and firmly. Forgetting the payment amount, the due date, or when the payment is to be sent all relate to understanding the terms.

You might even need to re-close this deal. Explain the terms again, making sure the borrower understands. Emphasize the call before the due date approach to place emphasis on the borrower calling you. You might even come across disputes over terms of the deal. These need to be negotiated and settled quickly.

1. Record Everything

Every conversation with the borrower regarding arrears needs to be recorded carefully. TEA's Contact feature is an excellent tool to make sure the dates and details are covered. The importance of this step cannot be overemphasized. You need to make sure borrowers adhere to the arrangements worked out. It means anyone else in your office will be able to see the deal. It tracks the collection techniques as well as timing that works and timing that doesn’t. It will also provide the details of your actions should this loan go to a lawyer/court for collection.

2. Late Payment Notices

These can be effective, but not recommended in the first few months and never for the first one. Solve any potential problem early. This requires personal contact. Early stage contact prevents dragged out situations and payment due date abuse later on.

3. Not Done Yet

Remember, if you are dealing with a payment in arrears today, that's only half the job. Every day that goes by means you and the borrower are getting closer to the next payment due date. For monthly frequencies this is extremely important. How will the borrower pay the last one and the next one? Solve that issue right now by making sure your arrangements include the next one.

In the next issue, we will take a closer look at Financial Performance. Stay tuned!

Back