Take six steps to make collecting overdue counts less unpleasant

Betsy Markey
Betsy Markey

Collecting overdue accounts payable can be an especially unpleasant part of doing business.

Most businesses have regular customers who pay on time and keep accounts current. But not handling late payments in a timely manner endangers cash flow and long-term viability.

Here are six simple steps to make the collection process less stressful and more customer friendly:

Make sure customers know the consequences of late payments. Establish a policy, and make your customers are aware of those policies before starting work. If you don’t have a formal contract, have customers sign off on your terms and conditions. The terms and conditions should state if you require a full or partial payment upfront or if you offer such payment terms as net-30. State in writing any surcharges for late or missed payments.

Loose credit terms can create bad debt. If you provide goods or services on credit, develop qualification standards that are specific, yet fair — a good credit history or bank references, for example. Put your credit policy in writing and make sure employees understand it. You should also have the policy posted in your store, on your Web site or available as a handout.

Enforce credit terms. Your collections policy will do no good unless you enforce it. You’ll be amazed what a personal phone call can do to encourage timely payment. If you’ve met your obligations and a customer hasn’t, you’re entirely in the right to make that reminder call.

Keep communication channels open. Don’t assume the customer is entirely wrong. Stay in touch and make sure they’re satisfied with your products or services. If they become delinquent, ask for an explanation. The invoice might have been lost or is awaiting approval. A customer with cash flow problems could request extra time. Based on your experience with that customer, you might feel confident enough to allow extra time or installment payments. Make sure you and the customer clearly understand any compromise agreement.

Don’t be afraid to take legal action. If your collection attempts fail, it could be time to turn to a lawyer or collection 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 on restoring credit, don’t immediately refuse unless you’re absolutely certain they remain a bad credit risk. 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.

The U.S. Small Business Administration offers resources to business owners on the right course to take when establishing collections policies. For more information, visit www.sba.gov.