Adam Parks (00:08)
Hello, everybody, Adam Parks here with another episode of Receivables Podcast. Today we’re going to take our episode in a different direction. We’re going to step back from the consumer credit world and talk a bit more about the commercial space.
As we’ve seen in the TransUnion Debt Collection Industry report, organizations that are looking to diversify their businesses from the consumer sector often look at commercial as one of those avenues for diversification. And so, in my copious time on LinkedIn. I met David Schmidt, who has a lot of commercial expertise to share with us today.
David, thank you so much for coming on and sharing your insights. I really do appreciate your time today.
David Schmidt (00:47)
Thank you, Adam. I’m glad to be here.
Adam Parks (00:49)
So, David, you and I have just started getting to know each other, but for anyone who hasn’t been as lucky as me to have had a few conversations with you, could you tell everyone a little about yourself and how you got to the seat you’re in today?
David Schmidt (01:00)
Sure, be glad to. So, out of college, I ended up getting a job with Dun & Bradstreet, writing credit reports. Back when they used to have people on the street doing it. So that was my introduction to commercial credit. And from there, I got some positions in mid-market companies, went through a number of them, and realized I liked cleaning up the department, getting things working, and organizing it.
But once that was done, managing wasn’t as interesting. So when the opportunity came, I went out on my own. I had a newsletter opportunity that helped support it. And so I’ve always had a writing component to my consulting.
And you know, I’ve actually been doing that since ’94. So the writing was an important part of it because that really fed my pipeline. And that’s the content management before there was content marketing. So yeah, that got me to where we are today.
And I’d worked for a long time with a newsletter called Credit Today. It was unfortunately closed in ’23. And a buddy of mine who was also working on it, Bob Shultz, and I tried to purchase it. That fell through, so we just started our own newsletter, called Trade, Credit, and Liquidity Management.
And so that’s been live for about a year and a half, and we’ve been building it up, and we’re reaching out to a broad community of corporations, as well as the ecosystem that supports them. So we’re trying to help all the business-to-business receivables management people, the order-to-cash people.
And also the whole vendor support community that’s in there. We’re trying to help people do their jobs better and also connect them to the other organizations that can help them do their jobs better.
Adam Parks (02:42)
Well, it sounds a lot like what we do in the consumer space. You’re doing it in the commercial space. And that is exciting for me to get to meet somebody else because I know from experience that when you write on a subject matter, you have to become an expert on that subject matter.
You have a lot of time to research, learn, understand, interview, and you find yourself kind of at the epicenter or at the true center of that topic and that community that develops around it, especially as you’re creating consistent and powerful content for a space.
So I’m really curious from a commercial perspective, right? As you think about the commercial space, and I’m sure you’ve seen some of the consumer space, what do you see as those core and key differences between those two worlds?
David Schmidt (03:24)
Yeah, there are quite a few differences. And I’ve done some consulting for companies on both sides of it. And they were having problems managing the commercial side of it because they were trying to do it like a consumer.
It just doesn’t work. The commercial side: consumers are pretty homogeneous. So one consumer is very much like another; you know, you have higher and lower risk, but otherwise consumers are pretty much the same.
The businesses, it’s not so much. So businesses are a diverse group. You know, there’s like nine hundred different NAICS codes, and you know, each industry’s different. And collecting in each industry is different. Collecting in the construction industry is a lot different than manufacturing, a lot different than consumer product goods companies.
So all of these different companies have different frameworks, you know, that the collector and the credit analyst up front, before that, have to deal with. And so it’s a very different situation, and companies have different channels. And so they can be dealing with multiple industries. So that’s what makes it a lot more complicated.
Adam Parks (04:38)
Well, that’s interesting because I think about it like a bank, right? Like Chase is lending auto, they’re lending credit cards, they’re lending mortgages, they’re lending right through a variety of different credit products, and your average business who has not set out to be a lender, kind of inadvertently becomes an extender of credit in the commercial space, especially if you’ve got net payment terms, whatever that is, 15, 30, 90, 60, whatever, whatever the magic number is for your organization.
But then you start to think about the different industries that they’re functioning in simultaneously. And I know from experience that there’s a big difference in the way that I would handle a credit card versus an auto account.
And if I’m not a bank that’s built to service accounts, that’s got to come with a lot of challenges. What are we looking at in terms of delinquency, deficiency, and charge-off rates? I mean, I guess let me start with this. The credit cycle itself, when we think about the commercial space, right? Consumers are 180 days delinquent on a credit card before charge-off. Is it as standardized on the commercial side, or is it a little bit more flexible per creditor?
David Schmidt (05:47)
Yeah, it’s a little more flexible, and that depends a lot on the organization. So you know what you have to deal with, and another differentiator, and this will help answer your question, is that you’re dealing with the 80-20 rule.
So 20%, sometimes just 10% of your customers are providing 80 or 90% of your revenue. And that makes for a whole different ballgame than consumer, where everything is probably in a band, let’s say.
So you’ve got to deal not only with the different industries; you’ve got to deal with the different-sized accounts, and you have key customers and then those not so much important customers to you.
So you know, that all reflects how you go collecting things.
When I started in this industry, people were collecting from an aged trial balance. So it’d be a printout, and they’d be going through it either alphabetically, or they might be able to get a list of the oldest debts to the most recent, and they’d go through it that way. So there wasn’t any strategy to it.
And automations helped change that and bring back strategy to it so that you want to be able to approach the accounts in an organized and efficient way. So you’re collecting max a dot; you’re optimizing the cash flow coming through.
So that’s something that we worked on. I wrote a book on automated collections with Fred Piumelli, who is the Founder of GETPAID Software. So this back in ’98, we wrote this, and he had come over from AT&T, and he had been working there, and he saw the obvious difference between consumer and commercial.
So his company wrote the first commercial collection package. And it completely changed the way people were handling collections because you had to prioritize things in a different way, and that efficiency in the workflows really affected how people collected.
Adam Parks (07:44)
Is there a difference in the communication channels that are being used here from a collection standpoint, right? Like letters have always been, or from a consumer standpoint, letters have always been the core requirement, right?
Until Reg F and things have kind of loosened up and changed a little bit. But we do phone calls; now we’ve started moving into text messages and emails, and that’s becoming more popular.
Do you see the same kinds of processes or the same kind of prioritization on the commercial side for communication channels?
David Schmidt (08:14)
Yeah, there certainly has been that. We don’t have the same regulation that the consumer side has regarding our contact. You’re contacting a business after all, not a person. So it’s, you know, you don’t have to worry about after-business-hours and things like that.
The challenge we have is getting through to the AP department, very often. So today we’re using a lot of email; text messaging is starting to grow in that, you know, and we’ve gone through letters, faxes, and all those things before. But what’s changing it a little bit now too is the call, obviously; at some point you gotta make a call if it’s not being paid.
And AI is changing that a little bit because AI is handling all the upfront messaging, you know, that can be done in the background- the text and the emails- and it’s moving the strategies along.
And so, when the time comes for a call, it’s going to be a much more difficult one. It’s not the easy, ” Hello, I’m calling up. You got these two invoices that are 20 days past due. You know, when you’re going to pay them.” Now it’s, you know, okay, what’s the problem, and, you know, how can we resolve this?
And so, a lot more negotiation and a lot more opportunity to come up with a payment plan. So it’s putting, you know, the collector can’t come in and, you know, get warmed up on easy calls, a new collector.
They’ve gotta be trained and able to handle the more difficult calls right from the get-go now.
Adam Parks (09:39)
Which I think is similar to what we’re seeing on the consumer side. The use, for example, of AI bots or voice bots has started on the inbound side of the world, right there replacing IVRs to handle incoming calls. We have started to see some of that outbound, but it feels like the balance that you’re dealing with for commercial requires a more direct or personal touch.
Right. The higher the average balance, the more likely it is to, you know, be more difficult to collect. Has that been your experience? And, you know, I mean, what, like, help me understand from a product perspective, like what kinds of average balances are we dealing with so I can give some perspective to that consumer collective?
David Schmidt (10:24)
Yeah, well, the average balance is gonna d change greatly based on product. So, you know, some companies are dealing in the hundreds and the low thousands; other companies are dealing in the fifty thousands up to the millions. And so there’s certainly when things get above ten thousand dollars, you know, then that’s serious money, you know, even if you’re a company doing mostly fifty-thousand-dollar invoices. Ten thousand is nothing to laugh at. So yeah, it is, and the other thing with commercial is that a relationship gets built up between the two companies. So, you know, it’s a supplier-vendor relationship in many situations, and it’s an ongoing thing. So you have to navigate that as well.
So there needs to be a lot of alignment with sales, and information needs to be traded back and forth so you can service the customer. And that’s another trend happening in commercial: the back office is moving much more up front.
Even though collections has always been customer-facing, companies are realizing that the back-office function needs to be front and center, part of the whole customer experience, and tied in there. And so you gotta get rid of the silos in commercial, or else you run into a lot of problems.
Adam Parks (11:47)
I think that’s the case everywhere. You know, one of the challenges that we’ve seen on the consumer banking side, and I’m curious as you’re dealing on the commercial side, is the consumer lender, for example, may have acquired multiple organizations over time. The data’s being housed in multiple places, and they’ve got some data issues that they need to clean up to be able to sell or collect on a portfolio, et cetera.
Do you see those same kinds of challenges on the commercial side, where organizations use multiple systems or different systems for different products, and they’ve got a more siloed data set, for example? That’s gotta create some complication in leveraging artificial intelligence.
David Schmidt (12:31)
Yeah, no, that’s not so much a problem. When there are mergers and acquisitions, you have multiple systems, and that’s when it shows up. And yeah, that can be a big hassle. So, you know, it’s pretty much the same system across the whole organization. As you get into global organizations and different business units, there’s a little bit of that.
But generally, you know, it needs to be under a unified policy, though you get into different countries, so there needs to be some flexibility in how the policies are applied there as well. So, you know, another differentiator when you start going international.
Adam Parks (13:13)
That’s a really interesting challenge in and of itself. Your average consumer, I mean, it’s a low percentage of consumers that exist across international borders, right? And for those who do, it’s probably an even lower percentage among those who are struggling financially. How does that start to look as an organization?
If I’m a small business selling pens. And I’m selling pens on a global scale, and now I gotta collect on a global scale. Do they tend to look for or build internal departments? Do they start looking for that international partner that can help them across the globe? You know, how does an organization even address that type of a problem?
David Schmidt (13:53)
Yeah, that’s been a challenge. And so you have EXIM Bank and the Small Business Administration helping companies get into export markets. That’s part of their mandate.
But yeah, it requires extra expertise. And very often the credit manager who’s only been domestic doesn’t have that international expertise. And so there’s definite training that needs to go on there. And there are some organizations that provide that.
But yeah, it could be a challenge because you start getting to documentary credits and all sorts of different, you know, credit and collection devices that you need to use on the international scale that you don’t necessarily use domestically. So yeah, that’s another whole world that we could get into.
Adam Parks (14:38)
Well, language barriers. And if I’m operating in six countries and I need a collector in each one of those countries, now I mean, I know it sounds minor, but dealing with the cultural and language barriers that would exist even within my own department, I think would be something worth concentrating on from a challenge perspective.
David Schmidt (14:57)
Yeah, absolutely. Now, the software that most people are using, and if you’re getting international, you know, I would hope that you’re automated.
But most of that is bilingual, multi-currency. So that takes care of some of it. So you can, and nowadays with AI it’s a lot more helpful, but yes, in terms of talking person to person, either you’re gonna need an agent in country to help you out with that or have bilingual collectors.
Adam Parks (15:22)
Yeah, the more and the more countries you got, the more difficult it gets.
David Schmidt (15:25)
If you’re talking to Europe, most of them speak English. But yeah, but other places in the world, yeah. So, you know, in Latin America, obviously you know, you need Spanish speakers or Portuguese
Adam Parks (15:37)
Very interesting. It’s just a different kind of challenge than we’re used to facing because I don’t have the same consumer in six countries. Right. But you’re dealing with consumers across those six countries. Unless I’m one of the top three, you know, largest debt buyers in the world, I’m probably not buying cross-border.
So it’s an interesting challenge. You know, from a commercial perspective, do you find that with those higher balance ranges that you start litigating faster, or do you guys have a rule of thumb litigation threshold in terms of average balance? I know it’s different than the consumer side.
David Schmidt (16:12)
Yeah, for most companies, we recommend they not go straight to litigation. They’re gonna go to an agency first. So they’re gonna work the receivables in-house, hopefully within 90 days. But once it gets up to that one hundred twenty to one hundred eighty day band to past due, that’s when things should be going over to an agency. And that should be part of their whole collection philosophy and policy to have an agency embedded there. And
Ideally, you’re working with two or three different agencies depending on the different industries that you’re in that have expertise in those industries. And you know, they’ll understand how to work your accounts, but yeah, if they think they can handle it, great, they’re gonna handle it; they’re gonna get the collections. But you need to move that along to the attorney network as soon as possible with that. And so you work with the collection agency on that.
And most of the claims are larger. So, you know, if it’s something that fits in small claims court or maybe it’s just a little bit above the, say, a ten thousand threshold, so you have eleven thousand owing, it’s probably more worthwhile to put it in small claims court than probably do it in a district court. So, you know, you have those types of things that you’re playing with trying to maximize return.
Adam Parks (17:35)
Yeah, and what makes sense from a litigation standpoint, because your court costs and things are gonna remain the same. And I think that’s, you know, the cost structure that we have to kind of think our way through as we talk about litigation.
David Schmidt (17:47)
Yeah, and that’s something you work out with the agency too, because you want an agency that’s gonna be able to collect a high degree in-house, not be passing them quickly on to the attorneys, because that just raises the cost for everybody.
Adam Parks (18:01)
Yeah, that’s pretty much the cost of it, right? And ultimately that ends up getting charged back. But once you’ve gone through litigation, you’ve got a judgment, you’re still trying to collect specifically from that corporation, unless there’s some sort of personal guarantee associated with that account, which I’m assuming would make it more consumer and not fall through this world as much, right? There’s probably a separation there. Do you treat personally guaranteed accounts differently?
David Schmidt (18:25)
Well, with the personal guarantee, you know, that can be fun too from a corporate setup. So you have a customer in a joint-tenant state, and you get a guarantee from the business owner. His assets are all held jointly with his wife. You know, you can’t go after it. So, you know, there are things to consider with a personal guarantee on a business that maybe you wouldn’t with a consumer, because you’re going directly to the consumer.
You know, so yeah, they help. that that’s a tool you that you use as leverage, and that’s, you know, one of the things that you wanna do from the whole opening of the credit file is you wanna have it well documented in terms of signed applications, signed credit agreement. And all that documentation that goes along with it. And then any personal guarantees, any UCC security filings that you’re gonna do, all of that needs to be done as appropriate.
So that’s all part of the mixture in construction. You have bonds and liens, so you need to be timely in filing all of those things. So that’s all part of this whole collection process of making sure you’re done. The I’s and crossing the T’s the whole way through it. So if you do have to place it with an agency, they’re gonna have something to work with.
Adam Parks (19:40)
Well, I would think similar to the way that we look at our origination documentation, you know, how are we originating a credit card account and auto loan, that businesses are also looking at their collections operations and trying to figure out how to fix their underwriting or their, you know, pre-collection processes to avoid that. Is that a big feedback loop within a lot of the organizations?
David Schmidt (20:03)
Yeah, that should be. You know, certainly in the larger organizations. You know, we find that in small and medium-sized businesses, you know, not so much. That can be a problem there.
And that’s something that a lot of them need to work on because, you know, the company grows all of a sudden, you know, the bookkeeper’s been handling collections. Now you got maybe the controller starts taking over you bring a controller in. Then that gets too much for the controller, and you start giving it to an AR clerk, and, you know, you don’t necessarily, at some point, need to bring in professional experience there. So that’s always a challenge for them.
Adam Parks (20:41)
Building the process itself around it, right? It’s when you’re growing an organization and the role keeps changing unless you’re documenting it and perfecting that process. But I think a lot of organizations go so far down the path that they end up with these collection problems, without thinking about how to fix them at the beginning of the relationship to stop it from sliding into where it is today.
And, you know, as a small business owner, it’s something I’m always looking at. If I got something that’s rolling into collections, why? What should I have done differently? How could I have communicated better? I feel like there are a couple of mechanisms that we can use to improve that vendor-supplier relationship and really kind of improve ourselves as we go through that process.
David Schmidt (21:24)
Yeah, no, that’s absolutely right.
Adam Parks (21:26)
Well, let me ask you this: what advice would you give to a consumer collector who’s eyeing the commercial space for potential diversification?
One, I would tell them to go read our newsletter and keep their finger on the pulse. But like, let’s start with that. What other advice would you have for them, you know, as they’re starting to eyeball the opportunities that exist in the collections space of the commercial?
David Schmidt (21:49)
Yeah. So it’s if if you’re gonna, you know, move into commercial or business collections, you need to bring in people that have that experience. You know, it’s gonna be difficult for someone that’s wholly been trained and gone through, you know, the process and developed on the consumer side to just step in and realize everything that needs to be done on the commercial side.
It’s a different world. I’d have the same problem if I went over to consumer.
Adam Parks (22:19)
Fair enough. It sounds like bringing a guide on the tour.
David Schmidt (22:23)
Yeah, and as I mentioned, it’s much more of a relationship because these are ongoing situations, you know. Even if it’s a bank loan, you wanna not only have that customer with a bank loan; you also want to sell them other products.
So you wanna build that relationship. Banks make money when customers buy three or more of their products. And on commercial, you know, you wanna be supplying that customer for years. And because that’s where you’re gonna really make your profits and your money.
Adam Parks (22:56)
Well, I think that’s some really great advice, David. And I’m going to include a link to your newsletter below just so that those of you who are watching today can get a chance to continue to learn some more about the commercial space. But I really do appreciate you coming on and sharing your insights today. I learned a lot from every conversation you and I have had. So I really do appreciate it.
David Schmidt (23:17)
Well, thank you for having me. It’s been a lot of fun.
Adam Parks (23:21)
Absolutely. For those of you watching, if you have additional questions for David or me, you can leave them on LinkedIn and YouTube, and we’ll respond. Or, if you have additional topics you’d like to see us discuss or questions you want me to ask about the commercial space, you can leave those in the comments below as well.
And hopefully I can get David back at least one more time to help me continue to create great content for a great industry. But until next time, David, thank you so much. I appreciate all your insights.
David Schmidt (23:46)
Thank you.
Adam Parks (23:47)
And thank you, everybody, for watching. We appreciate your time and attention. We’ll see you all again soon. Bye, everyone.
