Short Term Loans: Collections and Skip Tracing
Have a Collections Strategy to Retain Customers

At MicroBilt, we know that most of our customers that run successful finance businesses also run successful collections businesses. Whether they run a traditional business that offers financing to purchase a car or furniture or an alternative lending business providing cash advances and check cashing, a comprehensive collection strategy is critical to their success. So it was interesting to see a recent blog post on payday lending saying what we have known for years - successful payday loan businesses and check cashers are really collection businesses.

So why is that?

I have heard that alternative lending businesses that offer short-term, unsecured loans including payday loans, deferred deposit loans, short-term installment loans and check cashing will present a check or ACH an account three times. If the payment doesn’t clear after three attempts, then the loan is sold or sent to a third party collector and they move on to new business. The primary focus is on buying or generating quality leads and finding new customers.

A key metric of many businesses is customer retention based on the principle that the cost of retaining an existing customer is far less than acquiring a new customer. How could this be more true than in an alternative lending business where repeat business is essential for a profitable business. What surprises me is how any business that would work so hard and spend so much to acquire a new customer - a customer that could be worth thousands of dollars in fees over the life of the relationship - would turn that customer over to a third party without first making significant efforts to retain the customer’s business.

Given how much a good lead costs and how many transactions with that new customer it takes to recoup that cost of acquisition, it would only make sense to consider collections a core strategy for the success of your business. Certainly debt buyers or third party collectors are an important part of your collections strategy - there will always be a certain percentage of customer attrition despite your best efforts. However, you, the business owner, are the only one motivated enough to find creative solutions to retain the customer relationship. Only you can balance the desire to collect the immediate debt with the need to maximize customer retention.

In today’s economy, the typical payday customer is inundated with collection requests. An individual will have only one landlord, one power company and one cable provider, but they have many alternative lenders to turn to. So, alternative lenders need a collection strategy that places a high value on customer retention.

Verification - The First Step to Good Collections

"If it’s not verifiable it’s not collectible." It almost goes without saying, but the small amount of time and money spent verifying an application is the best collection practice you can undertake. At the point of application, an applicant’s name, address, phone, email, SSN, birth date, and bank account information and bank account status can all be verified instantly. It not only helps prevent fraud, but it allows you to capture simple mistakes in critical personal data - information essential for communicating with your customer and his/her bank. How much time and money are you going to waste if you don’t get the right information at the outset?

But now your customer has “defaulted” and you are trying to collect. Have you personally contacted the customer to see if they can make a small payment, any payment on the loan? If he can’t pay today, can you get a promise to pay a small amount on their next payday? Would it make sense to offer a discount on the outstanding balance to retain the customer and keep them coming back? This is standard practice for good businesses.

Skip Tracing
So what do you do when the customer can’t be located? Is it a lost cause and time to sell the loan? Are you really ready to sacrifice a customer when a minimal investment in time and skip tracing data might turn that skip into a long-term customer? Is your business to help individuals with short-term cash needs? If you can locate them, maybe you can offer them a way out of their immediate cash flow bind. This is where good in-house collection practice and access to the best skip tracing tools can turn a lost cause into another long-term customer.

Customers will change bank accounts, banks, addresses, phone numbers etc. in attempts to stay ahead of their creditors - but you have the access to the tools you need to find them. Unless the customer is a fraudster, he/she may actually be happy you found them, since you are the one business that will provide them the unsecured short-term loans to pay the phone bill or the rent. You have an advantage, so make it work for you and have strategies you can use to get them to pay something and keep them as customers. Make it easy to do business with you.