Four Ways to Get Consistent Payments from Borrowers

As a small lender, it's much more important that every one of my loans stays on track.  Once the loan is made, the terms are set, but I can still have an active role in ensuring the performance of my accounts.  These simple steps can help minimize risk and bring consistency to your cash flow.

Deposit checks immediately

When the borrower sends the payment, they've marked a piece of their bank account with your company's name.  The money is set aside, and typically, the funds are credited based on the date received and not the date deposited.  The borrower will appreciate the quick turnaround to their bank.

From the day they mail the check, each day that passes your money is sitting in their bank account collecting dust instead of interest.  If it's there too long, the borrower might find another use for it before the check clears!

Send statements like a metronome

Paying the bills on a fixed pay schedule is a fact of life for any modern adult.  Our borrowers receive their paychecks and the money gets earmarked for rent, cell phones, internet, and - hopefully - our loans.

Sending statements with military precision each month will help the borrower prioritize our loan payment alongside all the other essentials in their life.  When they know they'll get their statement on the 15th no matter what, they can be ready to make their payment by the 1st, no matter what.  Keep your payment schedule on their financial schedule by being as regular as any major lender would be.

Send fee notices the day they're incurred

If your borrowers will have to pay a late fee on a certain date, make sure you notify them that certain date has arrived.  It's been demonstrated that carrots work better than sticks at ensuring timely payments.  With typical annual interest rates from 6% to 20%, any discount offered would take a major bite out of our returns.  Since it's too expensive to offer carrots, we're stuck with sticks.

To minimize the negative effect a penalty will have on the timeliness of our borrower's timely payments, a little prudence can make a big impact.  Send the notice the day the fee is applied.  Use direct but non antagonizing wording to let the borrower know their lateness has negatively affected their account.  State plainly the consequences of further delinquency and invite them to contact you immediately to bring the account back in good standing.  Emphasize the path to prosperity in light of the current misstep.

Keep communication open

In a perfect world, our borrowers would pay all their loans exactly as scheduled.  In reality when funds are sparse, a borrower may have to choose between paying our loan and paying other bills.  We can help ourselves to a better spot on the priority list if the borrower values our relationship.  And we can't create value in a relationship without a little effort of our own.

Send the borrower annual or quarterly statements showing the amount they've paid, the progress made on the loan, the current interest and principal balances, and any other information which illustrates their success in repaying the debt.  Accompany the numbers with a message of encouragement and appreciation for their continued performance on the loan.  Positioning ourselves as the lender who values this borrower will ensure our debt is ahead of any other loans on their budget.

With any investment, there's a risk that comes along with the rewards.  By working with the real people behind our loans, we can help to create more stability and less risk for our portfolio.  Positive relationships with our borrowers might not be as lucrative as dozens of late fees and bounced checks, but it's certainly more consistent than a bankrupt borrower.