Small Business Debt Collection Process 101: Tips and Strategies for In-House Debt Recovery

Running a small business successfully requires a healthy cash flow. So, when past due customer accounts receivables start piling up, it’s not something that can be lightly brushed aside. Those overdue bills can seriously compromise a business’ access to working capital and ultimately put the entire business in peril.

But when it comes to the debt collection process, small businesses are generally at a disadvantage compared to their bigger corporate counterparts who have the resources to employ dedicated, trained debt collection departments. Within smaller companies typically the role of “debt collector” either falls to the designated bookkeeper or to some other “lucky” worker who is already juggling several roles and who has limited debt collection training, savvy, or know-how.

One of the most important factors that will determine the success of a business’ debt collection efforts, is the level of knowledge and preparedness with which it approaches those efforts in the first place.

What follows is a brief guide for small businesses on the debt collection process that will both help to explain the various aspects of in-house debt collection as well as offer some tips and strategies.

When is a Debt Considered Seriously Overdue?

After three months (90 days), customer accounts take on a delinquent status. Business owners should keep in mind that the chances of recovering a debt in full drop significantly after those initial three months have passed. According to the Commercial Collection Agency Association (CCAA), the probability of recovering money from an account 90 or more days overdue drops to 73 percent. As more time goes by the likelihood of cashing in plummets to 57% after six months and to only 29% a year later.

Good Debt Collection Policies and Tools = Successful Debt Collection

Small business owners can significantly increase their chances of collecting on an overdue account by incorporating the following tips and strategies:

1. Record customer information accurately and clearly.

Maintaining clear, accurate, and up-to-date credit files and payment histories on each of your customers is a must. To help in the process, business owners should use a good accounting software program, such as QuickBooks. There are also several good free open source options that can be used, namely Microsoft Office Accounting Express, TurboCash, and GnuCash.

2. Develop thorough and clear credit terms and conditions.

Clearly state the terms and conditions customers must abide by in order to receive credit from your company. Included in this written document should be a rundown of the actions that will be taken when accounts are seriously overdue. Make sure a copy of this policy is given to your customers the moment they establish a credit account, and is resent in the event of a delinquent bill.

3. Incorporate assertive collection tactics.

By stepping up your collection efforts from the beginning with a series of deliberate and assertive strategies, you will leave less wiggle room for your customers and ultimately protect your business’ bottom line. Such tactics typically include a combination of the following: running a credit check before extending credit, shortening the pay period, requiring a down payment, and requesting post-dated checks.

Assertive past due collection tactics should include:

Quick follow-up on an account as soon as it becomes overdue
Sending out a series of collection letters ranging in severity from a mere warning that an account is overdue to a final demand for payment before the matter is turned over to a third party
Closing or freezing the customer’s account
Attempting a series of collection phone calls
Requesting a face-to-face meeting
Attempting negotiation when there is a valid reason for nonpayment.
The bottom line is as long as the lines of communication are open, there is always some chance that you will reach an agreement and receive some or all of the money owed to you

4. Conduct an annual review and evaluation of the debt collection process.

Business owners should make sure that their collection process is in line with the current economic and/or market conditions. When the economy is in a downturn, businesses should be doing all they can to protect themselves against loss, but at the same time, they should also avoid alienating customers. Being assertive is a far cry from being aggressive. Business owners should think of ways to extend credit to customers who need, while at the same trying to minimize potential loss. Some examples of this were mentioned above namely, requiring a down payment or post-dated checks.

What Options are There for Collecting on Severely Past Due Accounts

In general, when an account has gone more than 90 days without payment, or when either communication attempts have been consistently ignored, promised payments are not met, or the person is unusually hostile, then it is time to seek outside assistance. There are basically three options for small business owners looking to recover some portion of their overdue customer debt: turn the matter over to a debt collection agency, take the indebted customer to small claims court, or hire an attorney. The following is a brief rundown of each option:

1. Using a debt collection agency to collect on past due accounts

The use of a debt collection agency in the recovery of overdue accounts is by and large the most popular option among small business owners- and with good reason. The main advantage to using a debt collection agency is that the agency’s employees take over the burden of sending collection letters, making calls, and negotiating payment. Business owners and their personnel are thus free to focus their energies where it matters the most- on running the business.

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