Credit staff need stop credit option
I know a credit manager who got a job at a private school in Australia. The school had a frighteningly high level of unpaid school fees. It wasn't hard to identify the cause of the problem. The school had a stated policy that "no child will ever be penalised due to his parents' financial situation." In other words, even if your parents don't pay, you can stay at school for up to 5 years.
The credit manager convinced the headmaster and the board that this policy was hopelessly flawed. They changed the policy, allowing her to remove kids whose parents hadn't paid. She then rolled up her sleeves and reduced the ledger from a seven figure problem to a low six figure problem, all of it under acceptable payment arrangements.
This solution may seem obvious. When people don't pay for the goods or service you supply, you withhold those goods or services. The generic term for this is "stop credit" or "stop supply", as in "I put them on stop credit." By using this tool, you stop the debt from getting bigger and you provide what is often a powerful incentive for payment. However, I tell this story because I know of a number of organisations that have fallen into this trap and haven't yet found their way out. I get people at our seminars who say that they need to learn how to persuade people to pay without using stop credit because their organisation has said they can't use it. Usually this is because it is an organisation with a strong sense of its social responsibilities, or because there are political sensitivities. Of course, the worst possible thing the "business" can do is publicly state this policy - "we will never put you on stop credit." Another way of putting it would be, "only pay us if you want to."
Credit staff in this sort of situation are often somewhat demoralised, as you would be if you were asked to do a job without being able to use the obvious and effective tool.
Why would a school board of trustees create a policy of, "no child will ever be penalised due to his parents' financial situation." For one thing, it's likely that those on the board believe that if people can't pay, it's because they have no money. However, an alternative view is that if people can't pay, it's often because they have chosen/or are choosing to spend their money on the wrong things. The Australian school credit manager talks of parents dropping their kids off in a new Mercedes, but claiming they couldn't afford to pay school fees. Her approach was to make them prove that they couldn't pay by getting detailed statements of position, backed up by evidence. When she got good evidence of hardship, she was prepared to make exceptions. However, often the evidence showed that the school was the only creditor missing out. This gave her the information she needed to convince the principal and board that the policy should be changed.
She has an interesting insight into the issue of collecting information from parents who can't pay. She says you have to make it hard for them to fool you. Remember, she will make exceptions for particularly hard cases, so people have an incentive to lie about their situation. She admits to being relatively intrusive in the supporting evidence she demands. "If they say they've got cancer, I want to see proof from the doctor. If they say they've been off work sick, I want to see medical certificates." Obviously, you wouldn't do this for someone who only wants an extra week's grace, but where they are asking for remission of fees, it's not unreasonable to ask for evidence.
Another belief often held by people who don't deal with many debtors is that when people say they can't pay, they can't pay. The contrary view, in terms of consumer debt, there are all sorts of options for borrowing, doing overtime, liquidating assets, getting support from family, or changing priorities about payments. What's more, people don't always know exactly how much money they have or what commitments they have coming. The bottom line here was that some people who thought they couldn't pay, could find ways to pay when pushed and given some financial advice.
The fact that the policy was changed to allow kids to be removed for unpaid school fees didn't mean that the credit manager went into a frenzy of kicking kids out. She removed two in the first year. She picked extreme cases to make an example of - her first was a big family that had sent lots of children to the school over the years and paid almost nothing. Without any publicity, the word of this spread, and lots of people paid their arrears. "I didn't have to remove many kids but I had to make the parents believe it was possible," she says.
Several years later, there are now four or five a year who leave. She admits she's less tolerant now than in the early stages. However, few of those children are forced out. In almost all cases, she talks to the parents and they decide they can't afford it and move the boy to another school.
This ties in with another important concept that the makers of credit policy should be aware of - you're not doing anyone a favour by allowing them more time to dig themselves further into a hole that they can't get out of. Stop credit makes people face up to their obligations and act. The quicker you make people face up to the issue, the better it is for them... and of course for the creditor.
This article appeared in the Mercantile Gazette in January 2006