Legal Ways for Small Businesses to Collect Debts

If you own a small business, you know firsthand how difficult debt collection can be. Small business debt collection is often one of the main failing points of many businesses throughout the country. With a little practice and courage, however, you may be able to lessen the amount of late payments that are due to you, and even know how to handle non-payment from a customer.

It is critical for the financial health of your company to have a positive cash flow. If your company has a lot of unpaid invoices or overdue accounts, your company is at risk.

Types of Late Paying Customers and Clients

In general, small business debt collection has to do with collecting money owed from customers and clients who fall into three categories:

• Customers and clients that will go to any length to avoid paying.

• Customers and clients that tend to have many payments due at once and pay them sporadically.

• Customers and clients that normally pay on time, but cannot because of financial trouble.

Customers in the last two categories are easier to deal with because they have a history of making full or partial payments. As a small business owner, however, you need to be able to devise a strategy and method for figuring out which clients and customers fall into the first category. In general, you will want to act quickly with regards to the first kind of customer, perhaps by calling a debt collection service company or sue for the overdue payments.

Regarding all small business debt collection — act quickly and stay determined. No matter what kind of client or customer you are dealing with, acting in a timely manner will ensure that you maintain your right to the money owed, and staying determined can ensure that you get paid in full. You should send past due reminders and collection letters to debt-owing clients and customers on a regular basis. There is no reason to wait until the end of a month to send an invoice or a past-due notice. Send notices immediately when the invoice comes in or when an amount is past-due.

Tips for Avoiding Late Payments

The best defense to bad debts is a good offense. Structure your business to let your customers know you expect to be paid for goods provided or services rendered on your terms. Make sure any invoices or paperwork clearly indicates your pricing, the amount due, the payment due date, and the methods of payment you accept. Include your contact information such as an email address and phone number so a customer can contact you immediately if an issue arises.

Ask For Immediate Payment. When you provide goods or services, ask to be paid upfront. If that is not possible, clearly communicate in writing your payment terms or expectations. For example, in a contract, you can specify that payment is due within 10 days of project completion.

Provide Different Payment Methods. Indicate if you accept checks, credit cards, PayPal, Venmo or other payment collection methods. A customer may prefer to pay the amount owed with a credit card so they can pay over time to their credit card company.

Add Fees for Late Payment. When issuing an invoice for payment due, indicate what late fees you will charge if not paid by a specified date. It may depend on your type of business but a company may typically add a late fee if a bill is not paid within 30 days.

Streamline Your Collection Process. If an invoice is not paid, have methods for sending out payment reminders about past due invoices. These could be sent every month. Once an invoice is a certain number of days past due, you may need to implement more debt collection strategies.

Debt Collection Strategies

You must create a debt collection process in your company to immediately follow up when a customer does not pay.

What follows are some more helpful hints for small business debt collection:

• Avoid harassing the people that owe you money. This is both a good customer service policy as well as a good legal policy. If your actions can be considered harassing, you may wind up losing a business relationship as well as facing a legal challenge. If you call your debtors, be sure not to leave more than one message per day, and never threaten or speak ill of a debtor.

• Keep communications short. Aim to keep phone calls or text messages short and formal. Do not imply that failing to make a payment is the same as a personal failure. Be sure to stay calm during the conversation, but always be clear that there is a debt that needs to be paid.

• Write demand letters. The letters that you write to your customers that owe money are called demand letters. You should be sure to send these in addition to making phone calls. Save copies of each letter you send. They may be useful if you have to go to a commercial debt collections agency.

• Set up a payment plan. If a customer indicates they intend to pay but is having financial trouble, consider working out a structured payment plan. Put the plan in writing and have penalties if the customer misses payments. You may want a business attorney to negotiate or draft such a payment plan so it is enforceable and in accordance with state laws.

• Offer to settle for less than is due. If you think that a debtor would be willing to do so, you may want to offer to settle for less than is due to your small business. This is a strategy often used for clients and customers that have no real hope of paying off the debt they owe. This settlement should be made official in a legal document that shows a payment of less than is due that satisfies the total amount of debt.

• Get a collection agency to write demand letters. Collection agencies are professionals when it comes to getting money that is past due. Therefore, it is no wonder that they write great demand letters as well. Many collections agencies offer this letter writing service at a fixed cost. You will normally get a series of letters to mail, each one escalating in intensity. However, debt collection agencies are regulated through the Fair Debt Collection Practices Act (FDCPA), which prohibits certain collection efforts that may be considered harassment or fraud. The FDCPA only applies to consumer debt and not commercial debt (debt among businesses). The law regulated third-party debt collectors and not small business owners looking to collect on their own debt.

• Hire a consumer debt collection agency. Collection agencies can often be your only hope to collect any money from a debtor. These agencies often charge a contingency fee of up to 50 percent of what they collect, but getting some money on your receivables is often better than getting nothing. You can find out more about collection agencies by visiting the Commercial Law League of America.

• Small claims court. If you do not want to go through a collection agency, you can take legal action to get the money you’re owed. Depending upon your state, you may be able to file a claim in small claims court to recover the money owed to your business. Small claims court is a great arena for small businesses, as these courts are designed to eliminate the high costs of attorneys and other court fees. In fact, small claims courts are such a popular tool for businesses to use to collect debts under a certain dollar amount, typically $5,000-$25,000.

• File a lawsuit. If small claims court is not an option for you, and the amount of money is too great to hand over 50% of it to a collection agency, you may have to file a lawsuit in order to recover the debt. There are higher costs associated with this method, however, such as fees for attorneys as well as court costs.

Get Legal Help With Your Business Debt Needs

If you’re trying to collect from late-paying (or non-paying) customers, it can have a serious impact on your ability to do business, while eating up valuable resources and time. Make sure you’re doing it efficiently and in compliance with the law by seeking legal advice from an attorney. Don’t let unpaid debts sink your business — talk to a local business attorney today.