Amy Hardison White

Debt collection: if you have to do it, be careful

Debt collection is an arduous task that many business owners would prefer not to think about. You’d rather focus on the product or service you are selling, right? It makes sense - that’s why you started the business in the first place. Unfortunately, most businesses experience some amount of revenue loss from non-paying customers. So what can you do about it?

First of all, there are numerous steps you can take to reduce the amount of debt to be collected. Adding these steps to your business processes may get you to zero - or as close to zero as possible.

Start as early in the customer acquisition process as you can. If you choose to share payment terms with customers on your site (or elsewhere), you can set their expectations on doing business with your company.

Have customers commit in writing to your payment terms and/or terms of service. If you’re dealing with enterprise clients, this can be in the form of a contract. For high-volume small businesses or consumers, you can add terms to the signup process on your site. Make sure these terms clearly outline your own guidelines for doing business.

Terms will vary based on the market and what your customers will tolerate. Here are a few examples:

  • Upfront or pre-pay options. Requiring all or a portion of payment upfront can help safeguard against debt issues down the line.
  • Clear timelines for payment due dates. Make sure prospective customers understand payment deadlines, rather than being surprised by (and possibly not paying) an invoice.
  • Incentives to pay on time. Consider offering discounts for early payments and penalties for late fees to drive desired behavior.
  • Dispute resolution language. Letting customers know how you would handle disputes if they arise lets them know you mean business. It also gives you an order of operations to follow if the situation arises.

Now that you’ve decided on terms, make sure you spend some time considering the payment forms you’ll offer. Offering a wide variety (including those with associated fees) makes it easier for customers find one that works for them.

Payment terms and options are only the beginning. Once customers decide to sign on, you need a framework in place that cancels out as many opportunities for debt as possible.

Put as much of the process on auto-pilot, so you can focus your efforts on true exceptions. Follow these tips:

Use an invoice management system to reduce time spent on the process.
Deliver invoices promptly, and send regular reminders to keep payments top-of-mind for customers. Make sure invoices, credit card charges, and any communications with your customers are clearly labeled. This will help you avoid credit card chargebacks due to unrecognized transactions. Implement a dunning management process to retry declined cards.

These processes will help you filter out the real non-payers. Once you’ve identified them, you have a few options. Payment plans are a way to allow customers to pay out a balance over time in installments. You might consider this step if the lines of communication are open, and you feel the customer will pay over time. Invoice factoring and/or invoice financing are options as well, especially if the debt you’ve incurred is making cash flow tight.

So let’s say you’ve exhausted all these options. Now it is time to decide if you want to further pursue debt collection. Take a look at the amount of debt owed to your company. What percentage of your total revenues are lost to debt collection? Is it worth it to take additional measures to collect it yourself, or hire a collections agency or lawyer, or should you just write it off as bad debt? Talk it over with a business partner or advisor.

If it is enough debt that warrants collection, proceed with caution. There are both federal and state regulations governing debt collection practices. Violation of these practices can incur stiff penalties. Not only that - if you hire out to a collection agency or lawyer, you’ll want to vet them carefully first. A collections agency or collections lawyer will be interacting directly with your customer, and has the potential to damage a long-standing relationship.

Review the Fair Debt Collection Practices Act (FDCPA) of 1977. This act defines what entities can be considered debt collectors, and once they are, the rules they are subject to. Whether or not you fall into the category of a debt collector, it’s best to stay on the safe side and adhere to the regulations. Many of them seem like common sense anyway - don’t misrepresent your business, don’t threaten those you are collecting from, don’t add extra fees on top of what the customer agreed to at the point of sale.

Understand your state regulations regarding debt collection. In addition to the FDCPA, many states have their own regulations governing debt collection, with their own definitions. State laws tend to be more strict the federal ones, so make sure to check them out as well.

If you decide to employ an outside party, do your research. There are associations for collections agencies and debt collection lawyers, like the Commercial Collection Agency Association and the Commercial Law League of America. These groups can help you find out if the collections agency or lawyer in question is licensed, and if they belong to the association. Be aware that these groups don’t have much power - the most they can do is cancel membership. But, they can help guide you in the right direction.

Debt collection is something most businesses have to deal with at some point. The best thing you can do is to create an environment where customers are likely to pay. When it comes time to decide what to do, you’ll know you’ve made every effort to collect.