The Power Balance in Debt Collections

It is important to understand the power balance in business-to-business collections. Failure to understand this essential element of the collection process weakens the creditor's ability to collect invoices as they come due.  All of the following statements are generally true about commercial [business to business] collections:

• Trade creditors have more power than they think they have. For example, the customer may need the creditors goods or services now or in the future, or may want to use the company as a credit reference.
• Credit managers need the ability to hold orders as leverage to force reluctant customers to pay immediately, or as leverage to negotiate a reasonable payment plan.
• Creditors can force a delinquent debtor into involuntary bankruptcy, but should do so only if it would be in their best interest to do so.
• If a creditor has a personal or inter-corporate guarantee covering a debtor's obligations, it has significant bargaining power.
• A creditor is in a better bargaining position if it provides a unique or proprietary product. If this is the case, the credit manager would be "unwise" not to use this leverage to secure payment from delinquent customers.
• When a customer has the creditor's merchandise and the creditor's money [in the form of unpaid invoices] the customer is in a relatively powerful position. Once a delinquent customer has paid the balance due, the balance of power shifts to the seller.
• Failing to react appropriately when a customer abuses your terms of sale changes the balance of power in favor of the customer in the short term and the long term.
• For every inappropriate action on the part of a debtor [such as breaking payment commitments] there should be an equal and opposite reaction by trade creditors. Failing to react appropriately to abuses by customers invites even greater abuse.

© 2010 by Michael C. Dennis.  All Rights Reserved