Collections. It’s a dirty word, but it has to be discussed. At some point, every small business will have a collections problem. There will be a customer who doesn’t pay you for your products or services. What will you do when it happens?
It’s better to have a collections policy in writing and a system in place to put that policy into action than it is to find yourself in the middle of a collections nightmare with no plan to get out.
Here are six things to consider as you develop your collections system:
1. Give Your Collections Policy to Every Customer
Hire an experienced business attorney now and get a collections policy that is created specifically for your business. This policy should be based on your business goals as well as what you’re able to commit to both financially and emotionally. A skilled attorney can guide you in creating a collections policy that will alleviate stress and give you a basis for pursuing collections problems in the future.
Once that policy is written, give it to every customer when they make a purchase and post it visibly in your brick-and-mortar store and on your website.
2. Send a Reminder
Your company needs at least one person from your team who is assigned to handle collections issues. First, send a gentle reminder to the customer. You’d be surprised how often customers simply forget to pay their bills!
If that doesn’t work, create a process to escalate the problem. Also, consider alternative payment options for extenuating circumstances. For example, an installment plan might help a customer who wants to pay but is in a financial crunch. Consult with a financial expert to create an escalation process and communications plan that works for you.
3. Hire an Attorney
If repeated attempts to collect payments are left unanswered, then it’s time to bring in an attorney who can send a letter to the non-paying customer on your behalf. Often, an effectively worded letter from an attorney can push a non-paying customer to action.
The first attorney contact shouldn’t be threatening, but it can be stern. After all, if you’ve been following your collections process, you’ve already given the customer a number of chances to pay. It’s time to get serious!
4. Work with a Collections Agency
Collections agencies won’t recoup your money for free, so you’ll end up losing some money when you work with one. However, you might prefer to get some money from non-paying customers by working with a collections agency rather than getting no money on your own.
Collection agencies’ rates vary but you can expect that they’ll get 25% to 40% of the amount due from each customer. You’ll get the rest.
5. Take the Customer to Small Claims Court
If nothing else has worked, you can file a claim in small claims court. You’ll need to check with your local court to determine if the amount due is within the accepted limit for small claims court.
Keep in mind, small claims court isn’t free. It will cost you both time and money, but if the amount due is high enough, a lawsuit could be worth it to you. Balance the pros and cons of heading to court before you file a lawsuit.
6. Write it off on Your Tax Return
If all of your debt collections efforts have failed, you might be able to get a tax write-off for the amount due through a bad business debt deduction. Check with an accountant to see if your situation qualifies.