Unless you deal exclusively in cash upfront transactions, collecting debts is going to be a part of the business in every industry. Even if you don’t have installment or pay later arrangements, checks bounce and credit cards get charged back. While a 100% collection rate is rarely possible to obtain, there are several steps you can take to minimize both your bad debt write-offs and the time and stress it takes to collect a debt.
Don’t Start Off Assuming the Worst
Many times, customers simply forget a due date or don’t realize they don’t have enough funds in their checking account. Starting with a rude message that threatens legal action will only put them on the defensive. Instead, send a polite reminder that their payment is past due and explain how they can go about bringing their account current.
Be a Little Flexible
Flexibility is key for two reasons. You don’t want to turn away repeat customers, and you don’t want to be so inflexible that you end up collecting nothing. Constantly allowing late payments is no way to do business, but allowing a one-time exception to your late fee policy or for a slight due date extension for an otherwise valuable customer can build goodwill that far exceeds the short-term cost. Just be sure to be clear that it’s a one-time-only exception, and stick to that.
Your other risk is that if the customer can’t pay your full bill now, it might be put off until they file for bankruptcy or you simply write it off. When a customer says, they can’t pay your bill, ask how much they can pay now. In many cases, the fact that you were willing to work with them makes customers feel a higher obligation to stick to the payment plan and less likely to try to find ways to avoid paying you at all.
Get More Forma
If a customer ignores your first reminder or doesn’t stick to a payment schedule, it’s time to show them that you’re serious about collecting payment. Send a formal reminder letter on company letterhead via certified mail both so that the customer knows you’re serious and so that you have a record of your collection efforts if you go to court. Depending on your level of patience, you can either inform them that failure to pay may result in collections action and damage to their credit, or you can wait for a second letter.
Consider Cutting Your Losses
Consider what you know about the customer’s financial situation and whether you’ll really be able to collect in full. If the probability of being paid in full is low, send a letter offering to settle the debt at a discounted rate if the customers pay within a fixed time. It’s not as good as being paid in full, but hiring a collection agency or attorney will probably also cut into what you recover, and if the customer has few assets, the collection agency or attorney won’t be able to do any better than you can.
Hire a Collection Agency
Collection agencies operate by buying debts for pennies on the dollar. For example, if a customer owes you $1,000, you might be offered anywhere from $100 to $500 for the debt. The good news is that if you find a collection agency willing to buy the debt, you get that cash immediately whether the collection agency collects from the customer. The bad news is that you are now guaranteeing you won’t collect in full. It’s up to your own risk tolerance and willingness to spend more time collecting to determine if that trade-off is right for you.
One more thing to consider is how the collection agency treats debtors. While you might not care about someone who didn’t pay you, a debtor can damage your reputation if they post on social media about perceived poor treatment by a collection agency.
File a Lawsuit
For larger debts, filing a lawsuit with or without the help of an outside attorney may be a viable option. Before going this route, you want to be sure the customer has assets to collect from because a court awarding you money means nothing if there’s nothing to collect. Also, consider whether you must pay attorney’s fees upfront or whether they will come out of your recovery. Some attorneys may be willing to work on a contingency fee basis so that they only collect if you win, but you generally can’t sue for extra money to cover their cost unless your contract specifically provided for the consumer’s payment of attorney’s fees and collection costs in the event of an unpaid debt.