Managing customers' accounts is crucial for any business. Planning payment terms and practices is the best way to avoid collection problems on business debts. Collection methods vary, and range from simple requests to filing a lawsuit against your customer. Know the options and plan how and when to use them.

Account Terms and Billing

Include clear and complete rules for payment in your account terms. Your customers should understand when they'll be billed, when payment is due, payment method and penalties for late payments. Offering a discount for early payment may work for your business and entice customers to pay invoices quickly.

Reminders and Personal Contact

When payments are late, one of the least confrontational things you can do is send a "friendly" reminder invoice that payment is due. Customers do forget to pay. Adding interest and late fees onto the amount owed is another way to get your customer's attention.

A personal call or visit to your customer is another option. You can privately ask when the customer will be making payment on the overdue bill. However, you must follow state laws on collecting overdue bills.

Formal Demand Letter

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

Hiring a Collection Agency

You may consider 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. You'll want to think twice about sending a collection agent for payment on a debt from someone whose future business you value.

Certain laws regulate what collection agencies can do to collect on a debt. The Fair Debt Collection Practices Act 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're attorneys or 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'll garnish, attach or sell property or wages, unless they intend to do so as allowed by law

Make sure to choose a good collection agency. In selecting an agency:

• Get your agreement in writing, including fees and payment terms 
• 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 against it

Small Claims Court

For smaller debts, it may make sense to file the claim in small claims court. The process varies by state. In general, it's geared to deliver a prompt legal decision at minimal cost. The rules are usually clear and simple. Standard forms streamline the paperwork you must complete.

Here's what you need to get started:

• An address where the customer can be served with legal papers
• Documentation on exactly how much is owed, including any contracts and collection letters
• Information on whether the customer has any assets or a job and income that could be a source for collecting on a judgment

Hiring a Lawyer

The debt may be more than the maximum claim amount allowed in small claims court, and you'll need to talk to a lawyer located near the debtor for collection help. 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 doesn't owe the money
• The difficulty of collecting on the 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.

Questions for Your Attorney

• Do our state's laws allow me to visit my customer to collect on a debt?
• What should I do if I disagree with the methods used by my collection agency?
• Can my business use an attorney for small claims court?

Related Resources on Lawyers.com^sm

- Contact a Debtor-Creditor Law Lawyer in your area for specific legal advice, and read about Selecting a Good Lawyer
- Need a form? Access a variety of do-it-yourself business and personal legal forms that meet your needs
- Read Creditors' Legal Rights and the Fair Debt Collection Practices Act, or access more Debtor and Creditor articles and information
- Visit the Legal Forums for discussions on Credit and Collection Problems
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- Legal Dictionary