Design collections before you lend: four things a company should settle before its first loan

Collections decide the result

When a company starts lending, the discussion usually centres on who to lend to and how much: credit criteria, interest rates and limits come first.

What finally decides the result, though, is how much of the money comes back and how much effort it takes. However careful the credit check, if nobody has decided what happens when a repayment is late, arrears are left alone and losses and workload pile up.

Collections are not something to think about once arrears appear. They are designed before the first loan.

1. How repayments arrive

Most late repayments are not about unwillingness to pay. The way or the timing of payment simply does not fit the borrower's life or business.

• Payment method: direct debit, bank transfer, e-money or payment at a counter — match what the borrower already uses.
• Due date: align it with payday, or with when the borrower is paid by its own customers. For working capital to dealers, the sales cycle is the natural anchor.
• Matching: set it up so each payment is matched to the right borrower and instalment automatically. Manual matching leads to chasing borrowers who have already paid.

How repayments arrive is the first collection measure, and it shapes the arrears rate itself.

2. Who does what, and when, once a payment is late

Set the response as steps by days past due.

• Before the due date: remind the borrower that payment is coming up.
• Just after it is missed: confirm you can reach the borrower and ask why. A temporary problem may only need a new due date.
• After a set period: move to a revised repayment plan or direct contact by a collector.
• Final stage: consider legal action or an outside agency.

For each step, decide who makes the call and what is recorded. Changes to repayment terms and waivers should go through approval, not be decided by one person.

3. Where lending stops and the core business starts

In a company's lending business, the borrower is also a customer or a business partner. Banks do not face this in the same way.

• Tone and frequency: how you collect is seen under the parent company's name. Set the wording and contact frequency to the same standard as customer service in the core business.
• Link to trade: do you stop shipping to a dealer who is in arrears, or keep going? Decide the rule in advance so sales and collections do not pull in different directions.
• Separation of roles: keep collection decisions away from sales, so a salesperson does not overlook arrears or loosen terms for their own customer.

Some countries regulate when and how borrowers may be contacted, and contact with third parties. The steps must follow each country's rules.

4. What is recorded

Collection records are tested later in three situations.

• Audit: who approved a change of terms or a waiver, when, and why.
• Disputes: what was said to the borrower and what was agreed.
• Improvement: which steps brought how much money back.

To answer these, keep the contact history, promised payment dates, and changes of terms with their approvals for each loan. Records that cannot be altered afterwards stand up to both audit and disputes.

Checklist before the first loan

• Do the payment method and due date match when the borrower is paid?
• Can incoming payments be matched automatically?
• Is it decided who does what at each stage of arrears?
• Do changes of terms and waivers go through approval?
• Are the tone and frequency of reminders, and the link to trade in the core business, decided?
• Have each country's rules on collection been checked?
• Are contacts and approvals recorded for each loan?

Collections are the part of a lending plan most often left for later, and the hardest to rebuild. Settle them before the first loan.