Debt collection is a problem that most businesses have to contend with. Recovering money that customers owe your business is a challenge that requires a systematic approach and careful judgment.
Effective debtor management is the best way to keep debt problems to a minimum. But despite all your best efforts, there will always be customers who don’t pay on time.
Identify potential bad debtors and act quickly
Set up your accounting system to flag overdue accounts. The sooner you take action, the more likely you are to get paid.
Conversely, inaction or procrastination will diminish your chances of getting any money. As with all debt collection tactics, wise judgment is essential. You don’t want to annoy important customers, but you also don’t want other customers (and there will always be some) to take advantage by treating your business as an interest-free source of money.
Handling overdue payments
There are no hard-and-fast rules on how to handle late payers. Your approach will likely need to depend on your history with each customer and their reasons for being overdue.
Take the initiative and find out why payments are late
Don’t expect customers to always contact you first about their payment issues – take the initiative yourself. Start by resolving or eliminating any obvious causes, such as:
- Your customer never received your bill, or the goods were sent to the wrong address. This may be an excuse or a genuine reason for non-payment. For bigger firms, the invoice may well have been sent to the wrong department where it was simply ignored. Make a point of sending a copy of your invoices within a day or two of a bill being overdue. You can also follow up with a call (if necessary) to ensure the right person received the bill.
- Your invoice or statement didn’t comply with the customer’s requirements. This can be a problem for larger corporations, as it can send your bill to the bottom of the pile or lead to it being ignored completely. Check the customer’s original order and compare any requirements to your invoice records. Make sure you included all the required details, such as the customer’s order number or account number, along with the name of the person or department who made the order.
- The invoice was unclear. Your bill may not have correctly detailed what goods or services were delivered. Also, make sure your payment details are clear and comply with the customer’s preferred payment method. For example, if your customer prefers online payment, be sure to include your account details.
- Your customer has a problem with your invoice or with the quality of your goods and services. If so, resolve any issues as soon as possible to reach an acceptable solution. This eliminates any further excuses for not paying.
- Your customer has a glitch with their accounting or payment systems. This can usually be resolved quickly − as long as it’s not an excuse for something more serious.
- Your customer has a cash flow problem. If you can negotiate a solution, get the customer to sign an agreed repayment schedule and make it clear that any partial payments will not be considered settlement in full.
Make contact with your customer
Once you’ve resolved any barriers to payment, make direct contact with your customer. Start with a polite reminder or enquiry about the bill, as overdue payment may not be any fault of the customer, and then follow up as necessary.
Try one or more of the follow-up tactics below:
- Personal visit – a face-to-face encounter can often solve the issue or ensure you get priority treatment. It’s also an opportunity to negotiate payment solutions. Perhaps the customer can pay by credit card instead of cash or through agreed installments, but make sure to obtain clear, written understanding that no partial payment will be regarded as a full or final settlement.
- Call your customer – your voice doesn’t have the immediacy of a face-to-face visit, as a simple call can make it easier for your customer to be evasive or offer the classic ‘the check is in the mail’ excuse.
- Email – this is the most distant tactic and is, therefore, the easiest for customers to ignore or evade.
Promptness and persistence are the two keys to getting paid. A single visit, call or email can be fruitless, but persistent follow-ups may very well do the trick - once the customer realizes you aren’t going to give up easily, they may prioritize your invoice.
Employ debt collectors or lawyers
If all else fails, consider debt collection agencies or a lawyer.
Try contacting your customer one last time to let them know you plan to pass the matter over to a lawyer or debt collector – you can always blame your ‘accountant’ for pressuring you.
Once you hand the debt over, there’s a strong possibility that the customer will realize you’re serious about chasing the debt. They’ll often pay up right away, either in full or in agreed installments. A letter from a lawyer or agency can go a long way.
Check the cost of various debt collectors
Ask your business contacts to recommend a few debt collectors or lawyers who specialize in debt collection, then compare their costs and services.
Costs are likely to include a flat fee or a percentage of the debt recovered – or a combination of both. Find out exactly what the fees cover and check if there are any additional charges.
Consider how much you’re owed
Is it worth chasing $500 when it’s going to cost more to collect the debt? Sometimes it’s better to write off small amounts to preserve an important business relationship.
Writing off late payment penalties could also be in your best interests if you’re chasing a large order from a customer.
