How To Collect A Debt

By Jennifer Fletcher, 20 Jan 12:19

Collect Debts... Keep Customers
"Did you forget?" We've all gotten the dreaded late payment notice. And we've all thought to ourselves, "They're a huge company. Why are they chasing me for my $39.95?" or "I really forgot, I don't deserve to be penalized." But as a business owner, you may find yourself on the other side of that late notice. Everyday, salespeople to accountants to owners run up against the dilemma of collecting past-due money from clients. Sometimes it is a large sum that could place your business in jeopardy. Other times it's a few dollars that may simply have slipped your client's mind.

Regardless, you depend on your paying customers to stay in business. But asking for payment is a very touchy subject that can lead to long-term repercussions if not handled delicately. By collecting debts properly, you can keep your clients and collect your money, without hurting anyone's pride.

First Steps
It may seem your clients have gone into hiding, but don't put the FBI on speed dial yet. Try these more benign "gentle reminders" first.

Send a Tasteful Invoice. One of the best, least confrontational ways of approaching this touchy situation is to draft a sympathetically worded invoice - something that makes light of their negligence. Often people have things on their mind and just plain forget. It may not be intentional.

If your client is a personal contact with whom you have had prior contact, you can include a personal letter with the invoice. State that you know they've been busy and the matter has probably just slipped their mind. For their convenience, you have included a self-addressed stamped envelope for their payment. Make it as easy as possible for them to pay. The self-addressed stamped envelope obligates them, but in a polite way.

Send Follow-ups. Clients may not respond to your first invoice letter. Most companies send several, with increasing urgency in tone. If time and budget allows, this is your next step. If you provide an ongoing service, you could warn them that their service will be discontinued if payment is not received. There are a few circumstances in which this is illegal. Check your local and state commercial laws to confirm.

Visit or Call. Either in place of or after written contact, a more personal approach is to contact the client in person. Place a phone call, tell them that you hate to inconvenience them but you are balancing your books and need to get all payments in. Or, if your debtor is a businessperson as well, go to their place of business and ask to speak with them. Once in private, casually ask if they ever sent payment. They will probably pay you then and there. For in-person contact, setting a meeting in advance is ideal, but not always possible.

Send a Third Party. One of the most common approaches, good cop/bad cop can work just as well in bill collecting as on Law & Order. If your other efforts have failed, try to have a third party (i.e. secretary, accounting department, assistant, co-worker, etc.) make contact. Hopefully they will pay on their own at this time. But if they do not, or they become sensitive, you can intervene politely and tell them you will handle the situation personally. This brings the issue to the forefront and allows you to get personally involved without making your client feel they've been ganged up on.

Add New Charges to the Old Bill. Many times people who have not made good on bills will come in and try to buy more from you. If a late-paying client wishes to make another purchase, ask if they would like to add it to their past-due bill. Of course, you don't want to conduct further business with them until they have paid you what is outstanding. Go through your payment procedure as usual and simply interject at some point whether they would like for you to add what they owe from the last purchase to this one. In most cases, they will pay the whole tab right then since the issue has been brought up.

Assess Late Fees. It may seem a little counterintuitive to ask people who can't seem to pay their bills to pay even more. But mounting penalty charges can be a powerful incentive to pay off debt before more is incurred. Just be sure to tell all clients ahead of time that late fees may apply if they don't pay their bills on time.

Desperate Measures: Legal Action
There are people out there who, for whatever reason, do not or cannot pay their bills. But you deserve to collect what is rightfully yours. If after exhausting all other avenues you simply can't get the client to pay, take action.
Hire a Collection Agency. Maybe you are spending too much time trying to collect overdue payments, and it's starting to affect your business. Or maybe repeated attempts at collection are in vain. Sometimes it's best to turn to a collection agency. These agencies work to collect payment of past-due bills for you. Professionals from doctors, retailers, and mail-order companies rely on them.

Much like lawyers, collection agencies take a percentage of the amount owed once it has been collected. Before you wash your hands of debt collecting forever, be aware that agencies often use severe tactics such as obtaining court orders requiring forfeiture of the debtor's wages, and/or reporting the offendor to the credit bureau, which could affect the debtor's credit record for years.

Go to Small Claims Court. If you have only one or two minor accounts in default, you might not want to go through the hassle of dealing with a collection agency. In this case, your best bet is probably Small Claims Court, a state or municipal court that deals with claims involving small amounts of money (the amount varies from state to state, but it's usually around $5000 and under). Contrary to the Hollywood version of small claims court, Judge Wapner will not be footing anyone's bill. Court fees can cost you several hundred dollars, not to mention time away from work.
Use a Business Manager. Before you approach an attorney, know that there are other types of counsel as well. In recent years companies have started hiring business managers on retainer to handle collection matters. Although not typically registered with the Bar, business managers are well versed in general business procedures and can handle matters that do not legally require an attorney, specifically, many collection practices. The advantage is clear - business managers can handle much of the same work as attorneys but at a fraction of the cost. Just remember - business managers are not authorized to practice law. If you need real legal advice or action, hire an attorney.

Hire Legal Counsel. Depending on the amount owed and what sort of business you are in, you may want to hire a lawyer to resolve collection matters. This is usually the final step you can take in seeking repayment of debts, and more often than not the money is recovered. This course of action usually also involves going to court or, if you're lucky, settling out of court. However, lawyer's fees can greatly impact the amount of money you ultimately pay out. Make sure the amount you seek is worth the cost to get it.

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