Debt Collection Tips For Small Business

Are you a small business at the end of your rope with a delinquent customer? Don’t despair, here we share ideas and tactics the pros use to collect money owed to small business!

Late-paying customers typically fit into three categories:

1. Those who want to pay, but cannot pay on time due to current financial strains.
2. Customers who can pay, but juggle payments to manage cash flow issues.
3. Customers who can pay, but instead try to take advantage of you for their own financial gain.

For customers within the first two categories there are simple tactics and common-sense tips for collecting money owed to you. For customers who have little to no intention on paying, even though they have the ability to do so, there are few options available outside of the legal system for collecting your aged receivable.

So, the first place to start is determining which category your customer falls into:

• Consider timeliness of former payments from them, if applicable. When was the last time you did business with them? Have they historically paid on time? Perhaps a temporary setback?
• Are they a referral account from another customer?
• Do you have accurate contact information and are the invoices/statements being received?
• Have your services and products been clearly itemized on invoices or statements?
• Are your terms clearly stated on your invoices or statements?

Once you have a general idea of which category your delinquent receivable falls into and you have answers to the considerations above, you can form an effective approach for collection of the delinquent account.

Here are some tips of the collection trade:

Be empathetic and listen. Remove emotion and be succinct. State the purpose of your call, state the days delinquent since the service was rendered or product delivered and ask when payment will be forthcoming. Most customers want to pay. Never call and harass or threaten a customer, ever.

Send a cover letter with the second or third billing. A handwritten and/or signed letter stating that the account is delinquent and you would appreciate payment by a <specific date> adds a ‘human element’ to the situation and may compel payment. People relate to people.

Be flexible and creative. If you believe the customer has a genuine financial hurdle, offer to extend a payment schedule providing they are able to make a “good faith” payment now.

Offer a one-time discount. If an account is sizeable and you’ve had little to no response from them with several communication attempts (ie statement, phone call, demand letter), offer a one-time discount if the account is paid in full by a specific date. Make sure your offer is in writing and the account will be denoted as paid in full when payment is received.

Write a letter of demand. Also known as dunning letters, these are specific demands for the collection of a particular account. A demand letter states the nature of the letter (demand for payment), the account for which the letter references, the amount outstanding, days delinquent and the final date for which the payment is due. Professional debt collection agencies and legal firms will state a course of action should the account remain unpaid by a specific date. However, and this is a word of caution, do not threaten an action you are not willing or able to take! For professionals, this is a potential violation of FDCPA regulation. For first party collections (i.e. you), this could potentially jeopardize collectability of the account or worse, dilute your reputation and collectability of other accounts. See sample dunning letters here.

Engage an attorney or collection agency. There are pros and cons to choosing a professional collection service and these are well-outside the scope of this paper. Some questions you may want to consider:

• Are they licensed and bonded?
• Tactics used to collect the debt?
• The agency or firm’s success rate?
• Contingency fee structure?
• Do they report to the credit bureaus?
• If an agency, do they have in-house counsel to escalate a debt to a judgment?
• If a legal firm, do they specialize in collections? Review your state’s court docket to confirm civil collection activity.
• Typical legal costs to escalate the debt to a judgment? Proceeding supplementals?
• Do they actively execute on court-ordered judgments via discovery (wage garnishments, bank levies, repossessions)?
• Do they specialize in your product or service market niche?
• Exclusive long-term commitments or obligations?

Most agencies utilize communication and psychological tools to elicit settlement or payment plans from the consumer debtors, while legal collection firms litigate the debt to a judgment and execute henceforth. Many agencies will furnish data to the credit bureaus and may subrogate larger cases to legal firms for litigation.

There are few legal collection firms that truly specialize in collections. Many will litigate the debt to a judgment, but then the judgment remains idle. The simple reason for this is that most fees are earned on a contingency basis and accounts can take a long time to reap payment rewards; years in fact. Results are produced from consistent skip tracing, discovery, proceeding supplementals and hearings. Timing is crucial, and for this reason there are very few attorneys that specialize in collections.

There are some collection agencies that offer a ‘hybrid’ combination of in-house services, but these are far and few between. These agencies tend to have a high case load and a dedicated paralegal staff to research and execute on judgments when the timing is right. These ‘hybrid’ agencies tend to produce a higher success rate of collections at a competitive fee structure, but are also more selective in accounts they’ll accept.

Bottom line is that it is prudent for a creditor to learn the provider’s system and tactics based upon their understanding of the debtor’s willingness and/or ability to pay now or at a future date. A creditor must also consider feedback repercussions in this day and age of social media. Often a third-party provider will insulate potential social repercussions and minimize legal liability for the creditor.

Alternatives to long-term commitments and saving money. There has been an increase of fixed-fee debt collection services within the past few years. Given the debt is not aged beyond 12 months and is not under the assignment of another collection professional, these fixed-fee services can often be a good option for collecting small business debt. These services are a good intermediary solution to strengthen the intensity and seriousness of your need to collect payment, without foregoing a sizeable part of your revenue in commissions and legal fees. One such example of a fixed-fee service is Centixx.com. A fixed-fee debt recovery service can be an effective and profitable solution for many delinquent accounts before a long-term commitment with an agency or law firm.

Collecting money you have already worked for and earned can lead to an emotionally-charged situation. Often it’s as much about principle as it is the money. If you have resolved to applying some of the tips and tactics presented in this paper without meaningful results, it is always better to leave the challenging accounts to the pros so you can focus on productive tasks and do what you do best. Your business depends on your ability to produce.