As a small business owner, you know that outstanding debt can have a crushing effect on your bottom line. In a perfect world, you would only do business with clients who always pay their accounts in full on time. Unfortunately, the truth is that, no matter how hard you work to avoid it, you may still find yourself with a client or two who either pays late or does not pay at all.
Here are some tips for recognizing that an account is on its way to becoming outstanding, as well as suggestions regarding what you can and should do to collect the delinquent account and prevent unpaid accounts from stifling your cash flow.
There are usually tell-tale signs that a client is having cash flow problems and may have difficulty paying your bill on time. For example, if you have a client who is now taking 45 or 60 days to pay bills that, in the past, were paid in 30 days, this change in payment pattern may be a sign that your client is experiencing cash flow problems of their own. Also, if a client suddenly becomes difficult to contact and doesn’t return your calls,this may also be a sign that an account is about to become overdue.
Fortunately, there are things you can do to lessen the impact of unpaid debt.
1. Start the business relationship off on the right foot. It’s a good idea to obtain a credit report for each potential client before extending credit to them, if possible. A credit report will give you valuable information, such as payment history data and bankruptcy filings, if any. In addition, perform a background and/or reference check on any new clients, and gather as much information as you can by law about new clients. This includes information such as cell and work phone numbers, current employer, emergency contact information, and full name including suffix. It’s important to know who you’re doing business with to spot any potential problems from the start and, in the event that you do eventually need to send an account to a collection agency, the personal data you obtain will greatly help the collection agency do the best job possible for you.
2. Set clear credit/payment expectations. Make sure the client knows your credit rules from the start, including payment terms, discounts for early payment and interest additions to late payments. It’s best to have some sort of written contract or financial agreement in place before the business relationship begins.
3. If a client fails to pay their balance due on time, contact the client and begin collection efforts the day after payment is due. Let your client know that you keep a close eye on accounts receivable activity and are serious about collecting outstanding debt.
4. If you find that your collection efforts are falling flat due to a lack of resources or expertise, develop a relationship with a reputable, experienced collection agency. Professional collection agencies have the resources and expertise to collect delinquent accounts across a variety of industries. Turning delinquent debts over to a collection agency as soon as possible greatly improves the collectability of the account and allows you to re-focus your efforts on running your business.
Business owners who have never worked with a collection agency should not be afraid to turn delinquent accounts over to a collection agency for fear of rude, aggressive treatment toward their clients. Reputable collection agencies understand that your goal is simply to collect the money owed to you without damaging your relationship with your client, and they will act with respect and integrity on your behalf.
5. Until a delinquent client pays you, don’t do anymore business with them. Or, if you must do business with them, insist that they pay cash up front for the services you provide.
While you don’t want to destroy any potential or established business relationships by creating strict payment terms, you must balance that desire with the need to take control of accounts receivables. Following these few simple steps may make the difference between simply having a few clients with cash flow problems and creating serious cash flow problems for your own business.
Written by: Nancy Richardson, MBA
Manager of Communication & Benefits
Stark Collection Agency