Looking for better strategies to take on your small business debt collection needs and collect overdue business receivables? In this guide, we’ll help you set up procedures that will eliminate some of your most common pain points.
What do I need to do first?
The first step you should take is determining how much money your customers, distributors, and others owe your business. Using your business’s accounting program, make the following calculations:
- The total amount that your business is owed
- The sum of the receivables that are at least 30 days old
- The sum of the receivables that are at least 60 days old
- The total of the receivables that are greater than 90 days old
The age of your accounts receivable is often a good indicator of the likelihood that you’ll recover the balance: Receivables less than 30 days have the greatest likelihood of being paid while aging receivables are less likely.
|Older receivables are the most challenging to collect, but according to Dun & Bradstreet, it’s not an impossible task. Their research shows that receivables that are 90 days past due have a 69.6 percent chance of being paid with a scaling set of strategies.
Using strategies like the ones mentioned in this article should help you collect on the bulk of your accounts, but keep in mind that it isn't always possible to collect the entire balance of your receivables.
What do I do next?
Next, send invoices to each party, requesting payment for the full amount they owe your business. Include an easy-to-find due date, and state the late fee you’ll charge for payments made after that date.
The due date has passed, and I’ve collected some of my business receivables. What about the ones that haven’t responded?
It can be tempting to send a follow-up letter or invoice, but a better strategy is to call the customers and distributors who owe you directly. The purpose of your call isn’t to act aggressively or threaten ramifications. Instead, politely ask your customers whether they’ve received your invoice and offer to accept payment over the phone. This direct approach should help you to collect a significant number of your unpaid business receivables.
Some of your customers may decline to pay by phone and promise to submit their payments the conventional way. Before accepting their promises, you might consider offering a small discount that entices them to pay their full balance on the spot. Depending on the size of their bill and the amount that you’re comfortable writing off, you might opt to offer a 5-10% discount on their total balance. This approach can be a smart move because the opportunity for savings can compel customers to pay up on balances that you may not have otherwise been able to collect.
I still can’t collect some of my business receivables. What should I do?
There are a few other tactics you can try to collect the outstanding accounts:
|1||Make another phone call and offer a higher discount that allows you to collect the bulk of the balance. If your customer is a business, consider asking to speak with a manager or the owner to resolve your claim.|
|2||Visit the customer in person. Be kind but clear with your request for payment. Ask what you can do to collect on the balance. If your customer hesitates, offer an even greater discount for immediate payment.|
|3||Write a letter to your delinquent account owners, informing them that their accounts will be turned over to collections or presented to a small claims court if payment is not remitted by a stated deadline.|
|4||Send the account to a licensed, bonded collections agency. Choose an small business debt collection agency that has a good reputation and follows state and federal laws for debt collection. Keep in mind that many agencies will keep a portion of the balance (often 50% of what’s collected) as payment.
Would you like to connect with a small business debt collection agency? Consider these options:
|5||For balances that are less than or equal to $5,000, you may file a small claims case with the county clerk’s office. You may need to sign an affidavit that states that you’ve made genuine efforts to collect. You might also need to complete a Statement of Claim form and pay a nominal filing fee, which can range from $15-$100. In most cases, you can complete the claim without an attorney’s assistance.|
|6||File a civil case for balances larger than $5,000. For civil cases, you may need to hire an attorney and pay a much larger filing fee. The amount of that fee is set by the municipality in which you file.
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|7||Sell the receivables that haven’t been paid to a factoring agency in exchange for a percentage of the invoice. This approach won’t help you recoup the total amount you’re owed, but it will enable you to receive a small part of the balances you’ve been unable to collect.
There are lots of organizations that handle invoice factoring. ACS Factors and J D Factors are two popular providers. You can connect with representatives from these organizations through the links provided.
By working sequentially through these practices, you should be able to recover a hefty percentage of your outstanding receivables.
Good small business debt collection practices can help you build your cash reserves and ensure you have enough cash on hand to cover the costs of operations. Find other easy financial tips in our Tax and Financial Library. Then log into your owner’s portal to access articles and a checklist with action steps curated for your business.