The Entrepreneur’s Guide to Small-Business Debt Collection
Small-business owners have to constantly worry about finding clients, marketing, paying employees, and scaling their businesses. Add to that one major enemy that ruins their cash flow and business plans: unpaid invoices by delinquent clients.
Abiola Abrams, a spiritual self-worth and business coach for soul-centered women entrepreneurs, had a stack of unpaid invoice totaling close to $4,000 from Mode Media, which abruptly shut its doors in 2016. To date, she hasn’t seen one penny.
“I have not recouped anything,” she says, “and I have heard the same from many others who were in the same position.”
I can commiserate. Since the first quarter of this year, I’ve had two invoices go over 120 days past due – one for freelance writing and the other for a shipment of books.
Unfortunately, our stories are behind some glaring statistics. According to a study conducted by Fundbox, “the total amount in unpaid invoices across all U.S. small businesses is approximately $825 billion.”
Yes, that’s “b” for “billions.”
Are you in a similar situation? Or maybe you just want to play defense. Here’s some advice to increase the chances that you’ll be paid in full and on time with every invoice you submit – as well as some small-business debt collection guidelines for those times when invoices do go unpaid:
You Can Delineate...
- Payment schedules, deposits, and payment milestones
- Compensation for adjustments or modifications
- Deadlines for service
- Ramifications for late payment
- Clauses for legal fees
- Guidelines for the premature termination of a project
- Copyright and intellectual-property ownership
Before You Agree to a Project
1. Create a Well-Written Contract That Lays Out All Your Expectations
You can create a lot of problems for yourself if you don’t have a signed agreement with your client. If clients aren’t willing to comply with the provisions within the contract, that may be a red flag.
2. Make Payment Easy
Offer to receive payment in a number of ways. In addition to receiving payments via credit card, opt to receive payments via PayPal, Stripe, checks, or Automated Clearing House (ACH).
Once Invoices Go Unpaid
1. Follow Up With Friendly Emails and Phone Calls
Whether you use a service that automates the collections process for your business or you do so manually, make sure that you follow up politely, but persistently. In your email correspondence, remind them of the signed contract and your desire to bring the account up-to-date as soon as possible.
Keeping communication open and professional makes it easy for delinquent clients to save face and provide an explanation for the late payment, especially if you’ve established a long-standing relationship with the client and they’ve honored invoices in the past. It also makes it more possible to create payment plans or schedule an in-person meeting to collect payment or negotiate the outstanding balance if it becomes clear that the client is cash-strapped, but wants to honor their debt as much as they can without involving courts and producing business acrimony.
2. Sue in Small Claims Court
Small claims court is a state court that resolves disputes involving relatively small amounts of money. The amounts usually range between $2,000 and $7,500, depending on the state.
If the client fails to show up to court, you win the case by default.
If the client loses the case and fails to pay the judgment voluntarily, you can employ traditional small-business debt-collection techniques, which include property liens and wage garnishment.
3. Hire a Collections Agency
Most companies send accounts to a collection agency when they’re over 90 days due. If you go this route, there are more than 5,000 collection agencies to choose from in the U.S. Make sure to choose an agency that has a track record of success using ethical, legal tactics to recoup money. A quick search of the Better Business Bureau or the Association of Credit and Collections Professionals (ACA International) can facilitate this process.
You should also make sure that you’re clear on the collection agency’s terms of payment. Some debt collection agencies don’t charge a fee until they recoup payment. Others require a percentage of whatever amount recouped, even if they weren’t able to secure 100 percent of the outstanding payment. For example, let’s say that they charge a 30 percent contingency fee on any amount recouped. If they secure $60 from a $100 invoice, you will walk away with $42 while they pocket $18.
4. Work With an Attorney
Business debt collection can be tricky to navigate on your own. Hire a lawyer who specializes in breach-of-contract cases. Retaining a lawyer will cost you money upfront, so make sure that the cost of contracting a lawyer doesn’t further limit your cash flow. You can also hire an attorney to draft a demand letter. This is a formal request for the client to either make a payment or set a timeline within which they will make said payment. Demand letters sent by an attorney may be more effective at getting a client’s attention.
5. Write Off the Loss and Move On
After you’ve fought the good fight and still haven’t received anything, you may have to accept that you’re never going to see that money. If you’ve provided a product to a client and received no payment, you can write it off as bad debt. Unfortunately, this caveat doesn’t apply to service-based businesses. According to Stephen Fishman, J.D. – an attorney and author focused on business, taxation, and intellectual property matters for small businesses – “The rationale behind this rule is that it would be too easy for independent contractors to inflate bills and claim large deductions for bad debts that were never really incurred.”
A Final Thought
Small businesses are a major part of our country’s fiscal backbone, but according to another Fundbox study, 64 percent of these small businesses are adversely affected by late payments or non-payments. When small businesses go unpaid, there’s a huge impact on our economy. Small businesses use their invoices to buy equipment, hire new talent, pay for marketing and advertising, and increase inventory and salaries.
That’s why it’s imperative that we honor the contracts that we create with small businesses – to ensure that these businesses are able to grow, thrive, and continue to provide the goods and services we want.