Every business has to deal with past due accounts at some point. In fact, your business model may include collecting accounts receivable on behalf of other businesses.
Too often, you probably find yourself making tough choices about accounts that seem like they’ll never be paid. You naturally want the customer to pay the obligation in full. Anything less means you’re taking a loss and well, businesses that operate with too many losses don’t stay in business for long.
Unfortunately, not all consumers can (or will) pay their bills and many outstanding receivables end up in collections for months, sometimes even years. While it’s not the ideal solution, making a settlement agreement with the customer can not only save your relationship with the customer, but also allow you to receive at least part of what’s owed.
What is a Settlement?
Offering a settlement on a receivable means you agree to accept a payment less than what’s owed to satisfy the account. The remaining balance is cancelled and as part of your agreement, you can’t come back later and collect this amount. You can, however, write off the cancellation as a loss. (Contact your tax professional for more details on including cancelled debts in your tax return).
Here’s how settlement generally works. Let’s say a consumer has a $2,000 balance, but can’t afford to pay the full amount. They can, however, borrow from a relative and make a lump sum payment of $1,400 within the next few days. The consumer is experiencing financial difficulty and isn’t sure if they’ll ever be able to pay the other $600. You can reject the offer and walk away from $1,400 or you can accept and consider the remaining $600 a loss.
How Settlements Can Benefit Businesses
Consumer benefits of settling the debt seem obvious – they get to pay less than what they owe and have the matter resolved. But, there are some benefits for businesses that decide to go the settlement route.
- You can rebuild customer rapport.
Nothing puts you on a consumer’s bad side faster than a demand for payment. Even when the consumer legitimately owes the balance, collection efforts are rarely appreciated. A settlement offer can soften the consumer’s view of you, making them more willing to work with you towards an amicable solution.
- Getting some money is better than no money.
You would, in a perfect world, prefer the entire balance, but a percentage of the balance is better than nothing at all, especially considering lots of receivable are never paid at all.
You don’t necessarily have settle for a percentage of the balance. You can also make payment arrangements, allowing the consumer to make payments on the balance until it’s paid in full.
- You can finally stop collecting on the account.
While it makes sense to spend some time pursuing accounts receivables, the more time passes, the less likely it is that the consumer will pay. Rather than expending time and money chasing a debt indefinitely, you can settle one account and move on to the next.
There is a direct relationship between the age of receivables and their deterioration in collectability.
Offering Settlements and Flexible Payment Plans
No two consumers are alike. It’s important to evaluate a consumer’s financial picture when you’re extending a settlement offer. Factors like income and family size impact a consumer’s ability to pay and should be considered.
With SettlementApp, you can offer a settlement or a payment plan and allow the consumer to choose the payment option that works best for them. Then, once the consumer makes a selection, they can pay directly through the app via credit or debit or even set up automatic recurring ACH payments.
No more chasing consumers, sending letters, or making dozens of daily phone calls to no end. With the options in front of them, consumers feel empowered about their choice and both of you can feel good about reaching a mutually beneficial solution!!
– HealPay, LaToya Irby.