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Small Business Debt Collection Basics

By Tom Stein

Monitoring accounts receivable is crucial for maintaining consistent cash flow. By following a few simple rules, small businesses can improve on collecting cash earned.

The collection process is initiated at the outset of a customer relationship. Small businesses should not be uncomfortable talking about the payment process at the completion of a sale. Letting customers know the terms of payment at the point of sale can prevent unpleasantness down the road.

Collection Policy
First and foremost, customers need to know that you expect payment to be remitted in full. They will take you seriously, and mostly likely pay their bills promptly, if they know from the start that there will be action taken if they fall behind. Customers should know when and how they will receive an invoice. An upfront deposit may be required, followed by an invoice for the remainder of the balance, or if the full balance is to be paid at a later date an invoice can come after the point of sale and the transaction is complete.

Customers should be made aware of payment options (i.e. credit card, check, cash), the terms of payment are, and if interest will be charged for late payments. The purpose of charging interest is to motivate customers to settle their bill on time.

Sending Clear Invoices
Information should never be an obstacle to collecting accounts receivables. An invoice sent to a customer should be clear and concise, containing all the information needed to make timely payments. Invoices must be numbered and they should detail the name and address of your business, the amount due, a purchase or confirmation order number if available, and taxpayer ID.

Failure to include any of this information could result in a delay or non-payment of the invoice.

To make the billing process more accurate, itemize charges whenever possible. This is so that if there is any dispute about the bill, both parties will know exactly what was charged for goods purchased or services rendered

Assume a consultant charges by the hour. The proper way to itemize in this case is to itemize by accounting as accurately as possible for every minute, and not simply to submit a vague, round number that appears to be pulled out of thin air. The consultant should include a list of every project that was worked on and the time spent on each one.

Get In Contact
Although it requires a little diligence, the best way to ensure collection of accounts receivable is to contact the customer a few days after submitting an invoice. This is to be sure the invoice was received, and you can also find out when it will be scheduled for payment. 

If an invoice is past due, an email or call to the customer could be warranted. The purpose is to serve as a reminder and that your payment should be a priority. When it comes to accounts receivable, the squeaky wheel almost always gets the grease.

Exhibit Professionalism
The nature of business is that there will be times when a customer either forgets or is unable to service their debt. Always remain professional with such a customer. It is unwise to wreck a business relationship because of a late payment. Be courteous and assure customers that you’re simply following best practices.

At no time do you want to harass a customer. Many states have laws governing collections. Failing to comply with them can put your business at risk. Debtors who sue for libel or harassment have been known to collect more than they owe in the first place. If you have an especially recalcitrant customer, consider hiring a collections agency.

Small businesses need cash coming in the door to grow; an effective accounts receivable collections program can help service that need.


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