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Hotel Accounts Receivable Collections Concepts

What do you do if you can't collect money from tour operators or airlines? Here is a solution.

Tuesday, April 07, 2009
Mr. Ron Feldman
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What are your options if you are a hotel operator and/or a hotel supplier when you have accounts receivable that you now realize you are likely not to be paid? What if your debtor is located in a different country than you are? Now what? This article will provide solutions options available on how to recover monies from account receivables that you believe have turned into bad debt, or likely to become bad debt for both in-country and out-of-country debtors, in an affordable and successful manner.

Hotels and hotel suppliers are sometimes afflicted with an equal opportunity annoyance: Having to collect on a debt from a client that they have extended credit. For a hotel in San Francisco, as example, if it has an international tour operator based in Seoul, South Korea that has been delivering individuals (FIT) and/or group business to the property, and has established credit where they have agreed to pay a hotel within thirty (30) days after services have been rendered (e.g. “net 30”), this off-shore debtor is a completely different business situation than an accounts receivable incurred by the same hotel in San Francisco with a debtor that might be a tour operator from Chicago, IL. This is the case for the obvious reason that in the case of the off-shore debtor located in Seoul, the hotel has to deal with time zone problems, as well as having the knowledge of the collections laws that govern that country on the federal and provincial levels. The hotel is faced losing the revenue for the services it has already rendered.

The secondary conundrum is that whoever is assuming the role of the credit manager at the hotel needs to weigh the likelihood of collecting the debt, versus the time and money expended to collect that debt. And, if the hotel had acquired the account from an active employee from the sales department, for those hotels large enough to have one, the credit manager should ascertain from that sales person whether or not they believe the delinquent client is either a “slow-pay” or a likely “no-pay”. If the former, the sales department will have a vested interest in retaining the relationship. If the latter, the hotel should take action.

Similarly, if you have a hotel furniture supplier in Santiago, Chile that has not received payment on a purchase order (P.O.) from a hotel in Heidelberg, Germany for hotel furniture, trying to collect on that type of debt may seem to be unlikely. Yet; there is a solution available here too.

The best solution for the hotel and/or hotel supplier to collect delinquent accounts receivables is to find a service provider in the collections industry that has in-house attorney’s on staff, as well as having a global network of attorney’s covering major countries.

Simply put, if the hotel and/or hotel supplier employs a vendor that has attorney’s in the clients own home country, they are not going to have any time zone problems, as well as understanding the law governing that country. They are going to be able to bring the debtor back-to-life in realizing that the hotel has engaged a law firm in their country, working on a contingency basis—meaning that if the debt is not collected on the accounts receivable, then; there is no fee. This becomes a win-win situation for a hotel, in the case where a hotel has already written many bad debts off of their books, that they have no chance of recovering. The only qualifications that the hotel has to provide is documentation on the debt to the attorney based collections group, along with the type of debt incurred (e.g. hotel rooms, F&B, incidentals, etc.), for each occurrence.

Collection industry statistics show that the chances of successfully collecting an accounts receivable ninety (90) days or less from the calendar date the debt was incurred are about 73 percent; but, fall to only a 56 percent success ratio between three (3) to six (6) month’s after the debt was incurred. And, finally, debts over a year old have about a 25 percent chance of being collected. Therefore, hotels can use these industry statistics to determine whether the pricing model charged by the global attorney based collections vendor coincides in the percentage of the debt that is being charged. Reasonable pricing models should scale the charge to the hotel based on the aging of the account receivable that is being collected. Avoid flat-fee collection agencies that do not recognize that accounts receivables are subject to the parameter of the aging of the account.

By doing this, you may have cases where you pay less than the typical 30-40 percent you would expect to pay to a reputable collections vendor. More importantly, a good collections service provider will not surcharge you to collect the debt in a foreign country. Let’s examine why this is the case, even though it would appear that the collection agencies costs would be higher. With a global collections attorney network, the debt is assigned over to the vendor, along with the collection of the debt, which is done by wire transfer, which allows for any country-to-country accounts receivable to be collected effectively.

Let’s not fault hotels for extending credit to tour operators. For those that remember when Eastern Airlines went out of business in 1989, many tour operators had to declare bankruptcy, because they had already paid the airlines for the air portion of air/hotel/rental car packages, and were unable to deliver the services to their customers who had pre-paid them, so that Eastern could pay its airline partners. Hotels know that if they do not extend credit to credit worthy tour operators, in many markets, such as Orlando, FL, which depends on leisure travelers, many of their competitors would gleefully take on their clients by extending credit. The point here is that even if a hotel does its due diligence in finding out that a tour operator is viable, there are circumstances beyond the control of the hotel that would affect whether at some time in the future the same tour operator might turn into a debtor.

For those accounts receivable where the debtor is located in a foreign country, currency conversion for the debtor’s home currency is automatically effectuated as part of the wire transfer process.

Accounts receivable generated by two parties in the United States may actually be more involved and complex than collecting an International debt, in some cases. Let’s say you have a hotel food supplier in Lincoln, NB that is owed on some money by a hotel in Omaha, NB. Any employee of the hotel food supplier business must make sure that in attempting to collect the debt, that they must be in compliance with the Fair Debt Collection Practices Act and the Fair Credit Reporting Act, or they could run afoul of the Federal Trade Commission (FTC), and wind up unknowingly being subject to fines for unintended illegal collection practices. For example, if the hotel food supplier makes an idle threat to collect on a debt by communicating to the debtor that they better get paid or they will take legal action, and leave them a voice mail in that regard, they could be subject to a fine that exceeds their receivable, in cases where the collector of that debt has not properly invoiced the debtor, or unknowingly encroached the law.

More importantly, hotels and hotel suppliers need to know that if they hire a collections agency whose employees, some of whom might be entry-level non-attorney’s, violate any of Federal, State, or Local Law, they themselves are subject to the same fines, which may exceed the amount of the receivable itself.

Hotels can mitigate accounts receivable by having a clearly defined credit policy. The credit department should work with the sales department to make them aware that bringing the hotel a piece of business that turns into a bad debtor is not just a situation where they should not be of help in the collection process by simply working with the credit department. This may be done in a positive manner, since the sales department employee has the interpersonal relationship already established with the client.

Procedures should be established with the hotel that when an invoice is sent out, this is followed up with a polite phone call to the client to confirm that the invoice has been received. And, at that point, the credit manager (whoever that may be at the hotel) needs to establish an assumptive dialogue with the client after receiving the invoice that says, “Do you have any questions regarding the invoice itself. Assuming the client says “No”, there are not outstanding issues. Then, continue with, “Great, so I can tell the hotel management team that you will be sending payment to us for the services we provided.” The point is that the hotel should have its own script that meets its own needs to satisfy the account of the debtor.

In these tough economic times, businesses all over the World are having problems with cash flow. Add to that, the pressure that has been put on major banks. For example, in February 2009, one of the top five banks in the United States, which was doing the credit card processing for over four years for a health care clinic in Murrieta, CA, refused to release the funds for services that had already been rendered until the health care clinic had built up a $200,000 cash reserve for its credit card processing with the Bank. The problem was that the health care clinic had no notice that this was coming, and only processes $700,000 per year. The Bank had claimed it could institute this practice under the Troubled Asset Relief Program.

In regards to accounts receivable encountered through a credit card chargeback, the hotel or hotel supplier needs to have established documentation at the point of sale to confirm that services were rendered for any transaction, so that the chargeback can be reversed.
Take the example of a hotel reservation made over the phone. The hotel should have a script developed that ensures affirmation from the customer that they acknowledge the hotel cancellation penalty.

On another front, for those who have accounts receivable generated by a disputed stop payment, there are payment solution providers available that will even cover hotels and/or suppliers in the U.S. for those debts. This concept was presented in an article I wrote for HotelInteractive.com on April 18, 2006, entitled “Does Your Hotel Accept Checks”.

The bottom line is that accounts receivable for hotels and hotel suppliers can be a fresh area of opportunity in increasing profitability, by simply looking at all the parameters that comprise this area.
Credit
Mr. Ron Feldman
President
Owners, Principals, or Partners
World Business Services, Inc.
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