Every small business knows the importance—and the hassle—of collecting past due balances. Also known as accounts receivable, small business debts must be resolved to maintain positive cash flow and keep the lights on. To avoid cash flow problems, there are some efficient strategies for any small business to keep the books clean and healthy.
List the Due Date and Payment Terms on Every Bill
When you invoice customers, don’t just say “payment due upon receipt,” or “Net 15 days.” It is best to designate a specific date that a bill should be resolved. Also make it clear they must pay in full or if there is a payment plan available. Further, let them know subtly what the bill may increase to if not paid on time (when applicable).
As soon as a product has been received or a service rendered, immediately send an invoice to the customer. Don’t wait until time has passed and the service forgotten: do everything you can to let a customer know that your business is on the ball.
Keep Contact with Customers
Direct your invoices to the proper departments or financial personnel, and have that specific phone number available in the contact database. That way, if a bill is delinquent, you will immediately know who to talk to for debt resolution.
Systematize Debt Resolution
Have a script ready for speaking with customers, and maintain a calendar for when to take action with debtors. Make this process available to everyone in your collections department.
Contact Debtors in Cycles
After a period of no more than 30 days, call your debtors to make payments. (For more difficult debtors, you can tighten your cycle to a period of 15 days.) This makes the process easier for them (in case they forgot about the bill), and it allows you to know the state of their financial situation (especially if they are unable to pay). Keep clear records of each time you contact debtors.
Negotiate with Debtors
If customers can’t pay immediately in full, ask what they are able to pay and schedule a payment plan if necessary. Offer several different payment methods to your debtors. Look for mutually agreeable solutions to resolve debts. Sometimes your customers are just a little behind, and there are often solutions that can satisfy both you and your clients. Be open to this – it’s cheaper than hiring a lawyer.
Discontinue Services to Overdue Debtor
If a debtor cannot pay, then you must send them a written warning of a termination of services. This should be evident in your company policy, and it may protect you against legal ramifications.
Write Demand Letters
By writing a demand letter once customers are massively past due, you can take an intermediary step before hiring an agency or taking legal action. List all past due amounts, and refer to conversations and correspondences you have had with them previously. While your language shouldn’t be very harsh at this point (especially if you intend to continue working with them), be sure to let customers know that you are serious about taking potential next steps.
Collect Interest (Where Applicable)
Some states allow companies to collect interest on overdue payments. Find out if this is acceptable in your state.
If Necessary, Seek a Legal Solution
First, you must warn customers that you are planning to take legal action. Give them options to resolve the debt in the warning. Make certain that the customer is not bankrupt, since you are not allowed to send correspondences to individuals filing bankruptcy. If all else fails and it seems the customer is not intending to pay, do some research to figure out the best solution for your company, be it a debt collection agency, small claims court, mediation, arbitration, or reporting them to your state’s credit bureau.
Collections can be a difficult endeavor, but they are nonetheless a necessary part of helping small businesses thrive. In order to create an applicable collections process, consider the above steps and put them into a framework and action plan that makes sense for your business.