Small businesses rely on a healthy flow of income to remain in business—especially since over 50% of new businesses fail within the first five years. For small businesses, a bad debt can mean the difference between profitability and net losses. For a small business, collecting debts can be a difficult and, occasionally, litigious process. There are a number of things you can do to increase your chances of being paid. Read on to find out how to avoid bad debts, manage overdue payments and collect debts.
1. Develop a payment police
Before you provide any services or goods, contract with your customer so they understand what they are responsible for paying and when. Make sure all document language is clear. Discuss the account with the customer so you can be sure they are familiar with any charged amounts and due dates. Payment terms need to be agreed on by both parties.Consider adopting a late payment fee to encourage on-time payments. You may choose to charge a percentage of the total bill when payments become delinquent—2% is typical. Make sure all late fee policies are included in your contract or payment policy.You may prefer to ask for at least 50% of payment upfront. This ensures you at least receive something in exchange for your time and efforts.
2. List the due date on every bill you send.
Some invoices state, "payment due upon receipt." You may also use "net 15 days," "net 30 days" or any other period of time in which you expect someone to remit payment.
Placing a due date on a bill encourages your customer to include it in a current or upcoming billing cycle. If you do not place a due date on the bill, the business or individual may wait a month or two before paying, especially if bills are tight.
Don't wait 30 days from the date of service or delivery of the product to send out a bill. Bill every 15 to 30 days. The sooner you send out the bill, the more likely you will get paid sooner.
3.Send reminder bills
When a payment becomes past due, immediately send a reminder noting the amount owed as well as the fact that payment is now past due. Many customers are so busy that they simply forget a bill hasn’t been paid. They will often pay it as soon as they realize payment is past due.
Keep a record of all contact with the debtor. You will need the dates and times of your calls, letters and any other communication about the late payment, in case of legal action. You may also need to address this information when you contact the debtor.
4. Keep a contact with each company or customer
Make sure you have relevant contact information, such as address, telephone number and extension number, if available.It is also good to check in with your business contacts regularly. Engaged business relationships promote a mutual desire to fulfill transactions.Address each bill directly to the person who makes financial decisions in a business or the person responsible for the account.
If you don’t have a contact for a business transaction, you can usually call the front desk and be connected to Accounts Payable.
5. Create a procedure for dealing with debts
You will need to decide what happens when payments are late. Generally, you first send out a reminder, then call the customer or business that is late with a payment, follow up, try to negotiate and then take it to collections or pursue legal action if the debt remains unpaid. Everyone in your company should understand the process so they know where to direct those who owe debts when they reach out to you.
6. Understand your debtor
Try to figure out why the payment is late. Most debtors fall into 1 of 3 categories—either they want to pay but can’t do it on time because of difficulties with finances, they habitually delay payments as long as possible due to priorities for the month or they have decided not to pay you at all.When you speak to the person or department that owes you money, try to uncover what type of debtor they are. Once you understand if non-payment has to do with finances, priorities or actual avoidance, you can come up with a solution for both parties that is, hopefully, mutually beneficial.Know that a business with financial trouble may not want to discuss their possible failure.
7.Call the debtor about the account
The first step after mailing a bill and reminder is to contact them by phone. Identify yourself and your reason for calling. Do not harass the debtor, just be straight-forward. Always use a civil tone and try to convey a desire to keep a positive relationship. You can address consequences further down the line.
Ask the person how they are and if they received your invoice. To discuss the late payment, try: "I am concerned because your payment is now (insert how many days) late. What can I do to help you make this payment and minimize consequences, such as (insert consequence)?" You can also ask if there is a reason they want to discuss on why the payment has been late.Try to get a verbal agreement that the invoice will be paid and when.Follow up the conversation in a week by phone, email or mail.Never apologize for asking about a debt that is owed to you. Remember that the money rightfully belongs to you.
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