Few things are more frustrating than dealing with a client who won’t pay for products or services that you provided. And while you may want to head over to their home or office with a sock full of pennies, it’s best that you take a legal and calculated approach.
Understanding Small Business Debt Collection
At some point, every company will encounter a situation where a client doesn’t pay on time, refuses to pay altogether, or can’t afford to pay the full amount for services rendered. While each of these situations is notably frustrating, it’s important that you respond in the appropriate manner. How you respond will not only impact your chances of collecting on the debt, but it’ll also reflect on your brand image.
If you’ve been around for any measure of time, then you likely know that small business debt collection typically involves money owed from customers who fall into one of three categories:
- Customers who will go to any lengths necessary to avoid paying.
- Customers who have lots of payments due at once and pay them off sporadically.
- Customers who normally pay on time, but can’t because of financial issues.
“In general, you will want to ensure that your clients and customers fall into the last two categories,” FindLaw.com explains. “You will be able to manage and work with those that fall into the last two categories because they have a history of making full or partial payments. As a small business owner, however, you need to be able to devise a strategy and method for figuring out which clients and customers fall into the first category.”
It’s also important to recognize that not all debts and delinquent payments are the same. For example, a $250 debt from a long-time client who has never missed a payment is not equal to a $15,000 debt from a new client who has yet to pay you for any services rendered. You can’t take a narrow approach to debt collection. Everything happens on a per-case basis and you must be willing to adapt to the circumstances.
6 Tips for Getting Your Clients to Pay Up
It doesn’t matter if the client is someone you know personally and have a great relationship with or a brand new client that you’re angry with — you have an obligation and a right to collect the money you’re owed. The key is to be strategic in how you approach these situations.
1. Stay Calm
When you’ve provided services for a client and they don’t pay you on time, your natural inclination is to be infuriated (and you have a right to be upset). But it’s imperative that you take a deep breath and stay calm. The angrier you get, the less likely that you’ll collect on the full debt. The client will feel your wrath, will take it personally, and won’t feel like cooperating (at least not in at timely manner).
“Your mental state has a strong impact both on how you handle the debtor and how they respond to you,” collections expert Bob Tharnish says. “Treat each call as if it was your first call of a very good day. Put a smile on your face. If you were irritated on the previous call, take a few minutes to calm yourself and start afresh. The debtor will respond to your tone. Your upbeat mood will be contagious and you are likely to get a more positive response from the debtor.”
2. Know Your Rights
If you don’t have any professional training in accounts receivable or debt collection, then you’re probably blindly fumbling your way through the process of collecting payments. The sooner you educate yourself on your rights and legal options, the better off you’ll be. Not only will you understand the actions that can and can’t be taken, but you’ll also become more confident in your interactions with customers.
For example, did you know that you can legally search for someone’s social security number if that individual is evading your debt collection efforts? While there’s no free online lookup service, you can go through the legal steps to find someone’s social security number so that you can move things along.
3. Document Everything
Few things are as important as documentation in a small business debt collection situation. Should the debt ever lead to a legal battle in court, your ability to point to documentation will be very helpful.
Every time you talk to a client on the phone, record the phone call and take notes. Certify and copy every letter you send in the mail. Save email correspondence. Log visits you make to the client’s office or home. All of this information could prove helpful.
4. Avoid Harassing
There’s nothing helpful about harassing a customer who owes you money. While persistence plays an important role in collecting on a debt, there’s a fine line between checking in and pestering.
Harassing looks like calling a customer every single morning for 60 straight days and screaming at them. Persistence looks like calling every seven to ten days and giving the client some options by which they can start paying off the debt.
5. Offer to Settle for Less
Let’s say a client owes you $10,000 and is 120 days past due. You’ve been trying to collect on this debt for four months and feel pretty sure you’re never going to see the money. Before simply writing the debt off, it’s always a good idea to offer a settlement for less than you’re owed.
While the delinquent payment is stressful to you, rest assured that it’s causing more anxiety for the client. It’s probably keeping them up at night. If you come to them and say you’re willing to take $5,000, they may jump at the chance to get it off their books. And considering that you already counted it as a lost cause, that’s a $5,000 win for you. You’ll never know until you ask!
6. Hire a Collection Agency
If you have a lot of outstanding debt owed to you and you’re spending a lot of time trying to collect on it, it may be worth your time to hire a collection agency. Not only will this save you time and possibly allow for better results, but it could keep you out of legal trouble.
“The Fair Debt Collection Practices Act (FDCPA) became law in 1977, and it governs how debts may be collected,” explains Mike Periu, president of Proximo, LLC. “The law mainly regulates companies that are engaged in the business of collecting debts on behalf of clients or that buy debt at a discount price with the goal of collecting on it.”
Registered debt collection agencies understand the intricacies of the FDCPA and you can avoid putting yourself in a compromising position by working with them.
Learn How to Walk the Line
Debt collection isn’t fun. Sometimes you feel like you’re being a pushover and other times you feel as if you’re being too harsh. The goal should be to walk the line well enough that people take you seriously and pay up when they’re able. You’ll occasionally have to write off bad debt, but follow the aforementioned tips and you’ll have some success.
Calculating Photo via Shutterstock
Some companies simply discontinue service. I just don’t know how effective this is. But it gets their subscribers to pay.
I agree with the approached mention it a delicate approach to collect and retain long term customers. in most case it is to your advantage to work with long term existing customer
Part of the equation is will this person likely provide you with future value before you burn a bridge. Working with someone in your industry can avoid negative side effects. Our teams have amazing high collection rates for small to middle sized businesses but this is something to weigh in.
How old is ‘too old’ to try to collect on a debt? I recently came back to a company and the gal that did AR MARKED accounts as collections, but never did anything. I have a $2500 balance from 2016. Is it still viable to try and collect on?
Missy. Great question for an attorney in your state. This relates to the “know your rights” section above. Debt collection laws can very in small ways state to state. Talk to a local attorney. BTW, I’m not an attorney, but I can help connect you to a firm in your state!
Can you email a client everyday to get payment status of a debt?
I think doing it every would be a form of harassment..Send email first and if no response then reach out to debtor by phone.
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