Collecting Business Debts

Getting slow-paying customers to cough up what they owe is frustrating and a big drain on cash flow. But there are ways to nudge a customer into paying.

Reminder Invoice

One of the least confrontational things you can do is send a "friendly" reminder invoice that you haven't yet received payment. Adding interest and late fees onto the amount owed is another way to get your customer's attention.

Formal Demand Letter

If your client doesn't respond to friendly reminders, a formal written demand for payment can work wonders, especially if it includes a warning that service will be discontinued if you don't receive payment.

Personal Contact With the Customer

As long as you follow state laws on collecting overdue bills, you might consider calling or personally visiting your customer. You can then privately ask when the customer will be making payment on the overdue bill.

Hiring A Collection Agency

These agencies take a percentage of the amount you're owed after it's collected.

Collection agents often use abrasive methods of collecting, so you'll want to think twice about sending a collection agent to collect a debt from someone whose future business you value.

The Fair Debt Collection Practices Act [internal link to Fair Debt Collections Act piece] prevents collection agencies from:

• Using threats of violence or harm
• Publishing a list of debtors (except to a credit bureau)
• Using obscene or profane language
• Repeatedly using the phone to annoy someone
• Falsely implying that they are attorneys, government representatives
• Suggesting that papers sent to debtors are legal documents when they aren't
• Misrepresenting the amount of debt owed or collecting more than is owed
• Suggesting they will garnish, attach or sell property or wages, unless they intend to do so and it is legal to do so

In selecting a collection agency:

• Get your agreement, especially as to how much and when they will be paid, in writing
• Ask for references
• Check the agency out with the local Better Business Bureau and your state's Attorney General's Office to see if there are complaints about the way in which the agency goes about collecting debts

Small Claims Court

For smaller debts, it may make sense to file the claim in Small Claims Court [internal link to Small Claims Channel Page]. The process varies by state, but in general is geared toward fast, cheap results. The rules are usually clear and simple, and standard forms take the pain out of filing legal paperwork.

In order to sue someone in small claims court, you'll need:

• An address where they can be served with legal papers
• Documentation on exactly how much they owe, including any contracts and collection letters
• To find out whether they have any assets or a job which can be accessed to collect on a judgment

Hiring A Lawyer

If the debt is too big to process in Small Claims Court, you'll need to talk to a lawyer located near the debtor for collection help. Lawyers typically charge either by the hour or a percentage of the debt collected after collection.

If you're thinking about hiring a lawyer to help you collect a business debt, consider:

• How much out-of-pocket expenses - such as filing fees, service fees and hourly attorney fees - will cut into any money you collect
• Whether the nonpaying customer has any defense (like defective service or goods) that may convince a judge he or she doesn't owe the money
• How difficult it will be to collect on a judgment
• Whether you want to do business with this customer in the future
• Any consequences a lawsuit may have on your relationship with other customers

If you decide a lawsuit isn't worth the effort, you'll want to refuse service to the nonpaying customer and report the bad debt to credit reporting agencies. It may also be possible to report the amount owed as a bad debt on your business tax return.

Credit & Collection Problems Message Board for more help