Small business owners know collecting overdue accounts is especially difficult during a down economy. It’s not the most pleasant part of being an entrepreneur. But not handling collections expeditiously endangers cash flow and long-term viability. Here are six steps to make the collection process less stressful and more effective:
Avoid late payments: Establish a standard policy for payment and make your customers aware of them before starting work. If you don’t have a formal contract, have your customer sign your “terms and conditions.” Do you require a full or partial payment up front or will you offer payment terms such as net 30? Clearly state any surcharges for late payments.
Loose credit terms can create bad debt: If you provide goods or services on credit, develop qualification standards that are specific, yet fair. Put your credit policy in writing and make sure all employees understand it. You should also have the policy posted in your store or available as a handout.
Enforce your credit terms on all transactions: Your collections policy will do no good unless you enforce it. You’ll be amazed what a personal phone call can do to encourage a timely payment.
Keep communications channels open: Don’t assume the customer is entirely wrong. Always stay in touch and make sure they’re satisfied with your product or service. If they become delinquent, ask politely for an explanation. It could be that an invoice has been lost or is awaiting approval. A customer with cash flow problems may request extra time. Based on your experience with the customer, you may feel confident enough to allow extra time or installment payments. Make sure you and the customer clearly understand any compromise.
Don’t be afraid to take legal action: If your collection attempts fail, it could be time to turn to an attorney or collections firm. Your course of action will depend on the situation. You might decide the amount of the overdue account doesn’t justify the cost and effort to collect. If so, write it off as a bad debt and move on.
Don’t make the same mistake twice: Should customers with poor payment histories approach you about working with them or restoring credit, don’t immediately refuse unless you’re absolutely certain they remain bad risks. Determine if the situation has changed and decide whether it makes sense to restore the relationship.
As a precaution, insist on such stricter terms as advance payment or cash only.