How to Collect Debt Owed to Your Business

Small business owners wear a lot of hats. Often, the one they dislike the most is debt collector. Getting paid what you are owed is time-consuming and frustrating. No one likes to chase late payments from people who owe the business money for goods or services. Where should you start if you need to collect debt for past due payments and non-payment of money owed to your business? Here are a few ideas.

Create a Debt-Collection Process

You should develop a consistent debt collection process for your business from the start. This will allow you to better manage your normal cash flow and account for money you have to collect for unpaid debts from customers.

A first step in dealing with debts is to be careful and methodical with credit in general. If you allow customers to use methods other than credit cards to pay for goods or services over time, make sure the payment terms are clear and repayment is scheduled to be made in a regular amount until the amount due is paid in full. Confirm that you have good contact information for the customer and have checked their credit report prior to agreeing to any long-term debt recovery plan.

If someone fails to pay as required, the outstanding debt will need to be collected. Familiarize yourself with your state’s debt collection laws so you know the basics. Before you turn to a debt collection service or commercial collection agency start with a measured approach. Consider sending a demand letter or two requesting the money owed plus a late penalty or propose a payment plan. Take a look at these samples of collection letters that can be sent to debtors. Follow up regularly as needed.

When to Outsource Debt Collection

If your efforts at collection still prove unsuccessful over time, you may have to turn to a debt collection agency. If you do, make sure that the agency is licensed and bonded. In addition, make sure the agency operates under the Fair Debt Collection Practices Act (FDCPA). You can check with your state's consumer protection agency or regional office of the Federal Trade Commission (FTC) to see if there have been any grievances filed against the agency.

The Last Resort: Small Claims Court

If all other collection efforts fail depending on the amount of money you are still owed you should consider taking the debtor to small claims court. This type of legal action is one an individual can typically handle on their own. In many cases attorneys are not permitted in small claims court but you may want to consult a collections attorney to make sure you know what to do once you get there.

If you are a contractor and need to collect on a debt for work on improvement to real estate, you may file for a lien against the property. If the debt remains unpaid, a contractor has the right to collect on the debt at any foreclosure sale of the property.

As with many other areas of business, initial planning and clear company policies will help you avoid problems in the future. If, despite your work, you need assistance with business debt collection, meeting with an expert for legal advice is always a good idea.

Related Resources:

• Creditors' Rights and Collection Options (FindLaw’s Learn About the Law)
• Debt Collection - Overview (FindLaw’s Learn About the Law)
• Credit and Collections: Two Approaches (FindLaw’s Learn About the Law)