Bad debts should be rare, but sometimes even the most well-meaning customers don’t satisfy their obligations. They may have written a bad check or they may not have paid at all.
Regardless of how a customer’s debt became overdue, small businesses need to use documentation, diplomacy, and if necessary, a judgment, to collect what’s owed.
Get customers’ information up front. Della Clark, president of The Enterprise Center, a minority business incubator in Philadelphia, says the first step in resolving a debt problem is to verify that there’s no confusion over what the client needs to pay.
“Make sure the customer has signed off on the scope of services you’re providing,â€ she says. Depending on the product or service you offer, that means having a well-drafted contract or clear terms of sale.
“If you use invoices, send them out in a timely manner, and include a due date,â€ adds Harrrine Freeman, CEO and owner of H.E. Freeman Enterprises, a credit counseling service. “If you accept checks, record the [check writer’s] driver’s license number. With that number, you can report bad checks to the Chex system.â€
Appeal to your business relationship. If you find that a customer is slow to pay, try to resolve the situation cordially. Be nice.Â “When someone gets in a cash crunch, they tend to pay the relationship that’s most important to them first. You want to be high up on that list,â€ Clark says.
“Smaller companies are usually different from larger ones in that they have to depend more on their relationships with their clients. While they may still have the option to sue, it’s probably more important for them to preserve the relationship,â€ says lawyer Maureen Wood, a founding managing partner at Wood & Wood L.L.P. in Conyers, Georgia.
“To keep the relationship, start reaching out and sending letters to your client asking them to give you a call if they need to make payment arrangements. Try to keep that personal connection,â€ she says.
Use a collection attorney or reputable debt collection service. If the customer is still not able to pay, consider hiring a collection agency or attorney to collect the debt on your behalf, Clark advises. “The cost of a collection attorney can be anywhere from 20% to 50% of the outstanding bill, but it’s negotiable. The older the debt, the more the collection services will want,â€ she says.
One advantage of hiring a collection agency or attorney is they have the ability to put the outstanding debt on the debtor’s credit report, Wood says. As with any professional, be sure to get recommendations and check referrals before hiring them.
Go to court. If the other solutions don’t work, you could sue for the money you’re owed. However, know that even if you win, you still have to take steps to actually collect the money, Wood says.Â “You have to enforce the judgment.â€
This may involve garnishing the person’s wages or placing a lien on their real estate