Thursday, November 13, 2014
Half of all new businesses will fail within the first five years. Such nerve-shredding statistics are part of the reason startups and small businesses depend on steady income to remain solvent. One bad debt can mean the difference between a profitable quarter and a net loss. Three in a row and you could be done for.
Having a proper debt collections process in place is nobody’s favorite part of starting a business, but it’s absolutely essential to the long-term security of your enterprise. With that in mind, we’ve put together five top tips for improving your collections process:
1) Understand the Different Kinds of Debtor
You’ve started your dream business. You believe in it, and so does your growing client-base - except for one individual whose bill consistently remains unpaid. It’s all too easy to take it personally and begin wondering if they’re out to get you, but by applying Hanlon’s Razor you’ll see that not all bad debts come from bad people. There are three categories of non-payer:
  • Those who go to any length to avoid settling bills.
  • Those who have many payments due simultaneously and are ‘spreading their debts’ to ease the pressure.
  • Those who usually pay on time but have hit hard times financially.
Of these, only the first could be considered malicious. You should end your business relationship with them. Just don’t throw the baby out with the bathwater by losing sincere customers who are navigating dire straits right now but will pony up eventually. Instead, figure out a payment plan with them – the easier you make it for them, the more loyal they will be.
2) Devise a Collections Procedure
This should be understood company-wide from day one so that any employee who speaks to a debtor knows exactly what’s expected. Be sure to place a due date on every single bill so that clients can work it into their billing cycle, and decide how long after that date you’ll deem an unsettled debt ‘bad’.
3) Automate It
The human touch is an important part of collections, but certain processes are far more efficient with cloud-based solutions. Identify those tasks that can be automated, and limit agent interactions to those that cannot. Text messaging and voice broadcast are ideal for ‘first reminders’ and will help you differentiate between the bad debtors and the badly organized. If a client falls into the latter category, they will respond to your message – even if only to buy some more time. The malicious non-payers will usually ignore such missives.
4) Make an Offer
It pays to be reasonable. If you’ve identified a debtor with financial troubles and a sincere wish to resolve them, it’s often worth settling for less than is owed. If customer has no real hope of paying the full amount, you can at least recoup some of your money by reaching a settlement.
5) Know an Impasse When You Reach One
Sometimes, the pursuit of an unpaid debt is futile. You end up wasting company resources until you’ve spent more than you were owed. There are three main ways to deal with extreme cases of bad debt:
  • Hire a collections agency. They will usually charge a high percentage of what they collect, but it’s better than nothing, and you won’t have to pay anything up front.
  • Go to the small claims court. Depending on which state you’re in, the small claims court can help you recover money owed. The system was set up expressly to help small businesses by eliminating the cost of attorneys and other court fees.
  • Sue. If small claims isn’t an option, you may have to file a lawsuit. This is only advisable in cases involving large amounts of money; the risk simply isn’t worth it for most small businesses, so think very carefully before pursuing this option.
Thankfully, the majority of people either pay up on time or have a genuine desire to pay when they can afford it. Establishing a tight collections procedure as part of your business model will help you absorb some of the costs of dealing with well-intentioned but financially troubled customers.