Debt collection is a problem most businesses have to face. Recovering the money owed by your customers to your business is a challenge that requires a systematic approach and careful judgment.

Effective debtor management is the best way to keep debt problems to a minimum. But despite all your best efforts, there will always be customers who don’t pay on time.

Identify potential bad debtors and act quickly

Set up your accounting system to flag overdue accounts. The sooner you take action, the more likely you’ll get paid.

Conversely, inaction or procrastination will diminish your chances of getting any money. As with all debt collection tactics, wise judgment is essential. You don’t want to annoy important customers, but you also don’t want other customers (and there will always be some) taking advantage by treating your business as an interest-free source of money.

Handling overdue payments

There are no hard and fast rules on how to handle late payers. Your approach is likely to depend on your history with each customer and their reasons for being overdue.

TAKE THE INITIATIVE AND FIND OUT WHY PAYMENTS ARE LATE

Don’t expect customers to always contact you first about these issues – take the initiative yourself. Start by eliminating or resolving any obvious reasons, such as:

• Your customer never received your bill or the goods were sent to the wrong address. This may be an excuse, or it may be a genuine reason for non-payment. In bigger firms, the invoice may well have been sent to the wrong department, where it was simply ignored. Make a point of sending a copy of your invoice within a day or two of the bill being overdue. Then follow up with a call if necessary to ensure the right person got the bill.
• Your invoice or statement didn’t comply with the customer’s requirements. This can be a problem in larger corporations especially and it can mean that your bill is sent to the bottom of the pile or is simply ignored. Check the customer’s original order and compare any requirements with your invoice. Make sure you included all the required details, such as the customer’s order number or account number, and the name of the person or department who ordered from you.
• The invoice was unclear. Your bill may not have detailed what goods or services were delivered in the correct way. Also make sure your payment details are clear and comply with the customer’s preferred payment method. For example, if your customer prefers online payment, include your account details.
• Your customer has a problem with your invoice or with the quality of your goods and services. If so, resolve any issues as soon as possible to reach an acceptable solution. This eliminates any further excuses for not paying.
• Your customer has an accounting or payment system glitch. This can usually be resolved − as long as it’s not an excuse for something more serious.
• Your customer has a cash flow problem. If you can negotiate a solution, get the customer to sign an agreed repayment schedule and make it clear that any partial payments will not be considered settlement in full.

Make contact with your customer

Once you’ve resolved any barriers to payment, make contact with your customer. Start with a polite reminder or enquiry about the bill, as overdue payment may not be any fault of the customer, and then follow up as necessary.

Try one or more of the follow-up tactics below:

• Personal visit. A face-to-face encounter can often solve the issue or ensure you get priority treatment. It’s also an opportunity to negotiate payment solutions. Perhaps the customer can pay by credit card instead of cash, or pay by agreed installments, with the clear written understanding that no partial payment will be regarded as full or final settlement.
• Call your customer. Your voice doesn’t have the immediacy of a face-to-face visit, and this makes it easier for your customer to be evasive or offer the classic ‘the check is in the mail’ excuse.
• Email. This is the most distant tactic and is therefore the easiest for customers to ignore or evade.

Promptness and persistence are the two keys to getting paid. A single visit, call, or email may be fruitless, but persistent follow-ups may very well do the trick, once the customer realizes you aren’t going to give up easily.

Employ debt collectors or lawyers

If all else fails, consider debt collection agencies or a lawyer.

Try contacting your customer one last time to let them know you plan to pass the matter over to a lawyer or debt collector – you can always blame your accountant for pressuring you.

Once you hand the debt over, there’s a strong possibility that the customer will realize you’re serious about chasing the debt. They’ll often pay up right away – in full or in agreed installments. A letter from a lawyer or agency can be enough to do the trick.

CHECK THE COST OF VARIOUS DEBT COLLECTORS

Ask your business contacts to recommend a few debt collectors or lawyers who specialize in debt collection – then compare costs and services.

Costs are likely to include a flat fee or a percentage of the debt recovered – or a combination of both. Find out exactly what the fees cover and check if there are any additional charges.

CONSIDER HOW MUCH YOU’RE OWED

Is it worth chasing $500 when it’s going to cost more than that to collect the debt? Sometimes it’s better to write off small amounts to preserve a business relationship.

Writing off late payment penalties could also be in your best interests if you’re chasing another large order from someone.