On the previous page of this article, I suggested five proactive ways you could ensure your small business gets paid for the goods and services you sell, mainly by making your payment expectations clear to customers and rewarding them for paying promptly.
Unfortunately, even when you use all of these proactive ways to get paid consistently, you'll still have some overdue accounts. When the carrot doesn't work, it's time for the stick – otherwise known as collections.
This page explains how to make your collection letters and use of collection agencies as effective as possible.
6. Establish a follow up procedure for customers who miss payments.
The more quickly you follow up on a missed payment, the better your chance of getting paid. So set up a system for flagging late payments if you need to and a standard procedure for contacting the customer or client when his or her payment is late.
Typically, such a procedure starts with a letter that simply states the bill is overdue and requesting the customer's immediate attention to the matter and then moves through a series of collection letters expressing increasing concern. If there is no response to these letters, you are left with choosing between writing off the bill as a bad debt or turning the account over to a collection agency.
Nowadays there are many channels that you can use to contact the customer. However, some are more effective than others. If time allows, I recommend starting out with a phone call to "touch base" with the customer or client. You want to come across as friendly and polite, not threatening in any way. Sometimes the person has just forgotten or missed seeing a bill and a quick phone call is all it takes – meaning you get paid and you don’t have to go through any of the rest of the collections procedure.
Sending collection letters via email is nice because it automatically creates a copy of the collection letter for your files - and automatically date stamps your message. However, because of email filtering and email overload, it may not be a very effective way of getting your collection letters to customers and clients. You'll want to send them in other ways, too, such as regular mail, fax or even courier, depending upon the size and importance of the debt.
7. Turn the overdue account over to a collection agency.
Collection agencies collect debts for a fee or percentage of the total amount owed. This fee is based on how old the debts are (the fresher the better) and how much business a creditor has to offer. The standard rate in the industry for business-to-business accounts is 30 per cent. The rate for collecting consumer accounts is higher.
However, collection agencies have experience with and knowledge about debt collection that we, as individual business owners, don't have and hiring one can be well worth it if the amount of outstanding accounts receivable warrants it.
If you do hire a collections agency, note that although in Canada collection agencies are regulated by the province in which they operate, that doesn't mean that you have to hire a local collections agency; just that you need to be sure that the collections agency you hire is fully licensed and bonded in your province.
Proactive Policies Are the Best Way to Get Paid
As you've already guessed, the best ways to ensure you get paid for the products you sell and the services you provide is set proactive policies and procedures in place to cut down on the number of delinquent accounts receivable your small business has to deal with.
Things such as having credit policies in place, performing credit checks on customers and clients, having a partial payment policy and being clear and upfront about your payment expectations both in person and on your invoices will go a long ways towards ensuring that you get paid and your small business doesn't get stuck with a lot of bad debt.