How much is an adequate security deposit?

As we saw in my last issue (if you missed it, you can read it here), 60 days of exposure is about the best a utility can hope for, so a sufficient security deposit needs to be at least two times the average monthly bill. If your minimum security deposit isn’t at least twice your average bill, you run the risk of being stuck with unpaid final bills that you will end up writing off.

Many utilities, especially those that bill for electric or natural gas, find that charging a deposit equal to two month’s average bill is excessive. One solution to this dilemma is to charge a variable deposit where customers with good credit pay a minimum deposit and those with bad credit pay a much higher deposit. While this isn’t a perfect solution, it does alleviate the burden of a high deposit for those customers who have demonstrated that they pay their bills in a timely manner.

One way to determine your customer’s credit score is to contract with one of the three nationwide credit reporting agencies – Equifax, Experian or TransUnion.

Another option is to use the ONLINE Utility Exchange which also runs a credit check, but goes even further. In addition to reporting your customer’s credit score, the ONLINE Utility Exchange also protects against fraud by verifying that the applicant’s name and social security number match. It will also alert you if the applicant owes a past due bill to another utility for previous service elsewhere.

A huge advantage of running a credit check on new applicants is that the potential new customer must provide his or her social security number, because it is required to perform a credit check. This solves the problem of those customers who won’t willingly provide their social security number. Once you have the customer’s social security number, you have the most valuable piece of information you need if you end up having to turn the customer over to a collection agency or file a set-off debt claim against them.

Some utilities refund deposits for good credit after a certain amount of time. While I am not a proponent of refunding deposits for good credit, if you have a policy that requires you to, I recommend that you do so only for the very best paying customers. Even it means going before your board to update your policies, I would suggest not refunding a deposit until your customer has paid on time for two years with no late fees and definitely not if they have been cut off for non-payment in the past two years.

Finally, let’s look at a couple best practices regarding deposits…

If you don’t already do so, I strongly encourage you to revise your minimum deposit every time you adopt a rate increase. This keeps your deposit amount aligned with the amount of two month’s average bill.

I also suggest a policy if you have customers with older deposits that are less than your current minimum deposit. If one of these customers ends up on the cut-off list, I recommend that you require them to bring their deposit up to the current minimum deposit amount along with paying their outstanding bill and the cut-off fee. This insures that your utility is protected if this customer ends up being cut off for non-payment again and skips out without paying.

If you have any questions about your deposit policies or would like assistance in reviewing them, please give me a call at 919-232-2320 or e-mail me at gsanders@logicssolutions.com.

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© 2011 Gary Sanders