How does a small/home business collect overdue payments?
Home-based and small business owners earn money when clients pay their invoices (preferably in a timely manner). When clients don't pay, businesses don't make money. How should a home-based or small business owner pursue non-paying customers? Here are a few things to consider when pursuing payment for overdue invoices:
Make sure the business records and paperwork are up to date and organized. Home-based and small business owners are busy and wear several business hats. As a result, the invoicing process may entail sending an invoice, filing it away, and forgetting about it.
Keeping accurate and up to date records will help when tracking overdue invoices. The last thing a business owner wants is to be confronted by a customer claiming that the invoice was paid, but due to sloppy and disorganized files, there is no way to verify payment. Disorganization can be expensive.
ESTABLISH A BILLING PROCESS
Institute a billing process that will be used for each and every customer. A set billing process makes it easier for the busy business owner to determine what was invoiced, what has been paid, and what is overdue.
Monthly statements can serve as a payment reminder to past due customers. Many times, one statement is enough to remind a customer of the outstanding invoice, and they often remit payment accordingly. That eliminates the need for further collection activities. However, other customers may require additional reminders to pay the outstanding balance.
If the monthly statement has not worked, then it's time to step up the collection process. This may be in the form of including a handwritten note reminding the customer of the outstanding balance. Unfortunately, this method is time consuming if there are several overdue invoices.
A gentle phone call reminding the customer of the overdue invoice may be the next step.
Keeping in mind that one can attract more flies with honey than with vinegar. Keep the tone of the conversation pleasant. Before hanging up, get a verbal agreement as to when the payment will be made and follow the conversation with a letter confirming the payment agreement. Having a paper trail will come in handy if the collection process is escalated.
POTENTIAL PAYMENT PLAN
If the customer is undergoing financial difficulty, be accommodating and offer a payment plan. It's better to get some money over a longer period of time than no money at all. Additionally, once the customer gets back on steady financial ground, the customer may appreciate the act of compassion and potentially refer additional customers.
PRE-COLLECTION AGENCY TACTIC
If after trying all of the above and the customer still does not pay, speak with an attorney and ask for a demand payment letter. The letter should threaten to institute legal action if payment is not made. Before contacting an attorney, decide whether or not this customer is important enough to keep because once an attorney letter is sent, the customer relationship may be irreparably damaged.
HIRE A COLLECTION AGENCY:
If all else fails, depending on the total outstanding balance, the last alternative is to hire a collection agency. Prudent business owners should research each collection agency before signing on the dotted line. A collection agency may be successful in retrieving the outstanding balance, but the business will have to share a percentage with the collection agency.
All is not lost; some business-related bad debt can be written off on business tax returns. However, it's best to consult with an accountant for more information on claiming the uncollected debt as a tax write off.