Companies thrive by building trusted business relationships
with their customers. Sometimes, however, small business owners find that
customers fall behind in payments for goods or services they’ve already
received. Depending on each situation, there are a number of ways to deal with
this.
Review the Age of Your Receivables
It is easy to miss the trends in your customers’ payment
histories unless you review the age of your accounts receivable at least once a
month. Accounting software programs can provide this information in an aging
report if the receivable was entered when the purchase was made or the service
was provided to the customer. Monitoring your receivables will help in avoiding
the number of customers who eventually become an uncollectible debt.
Speak Up
In some cases, the customer may be ready and able to pay,
but your invoice has simply slipped to the bottom of the stack. To maintain a
healthy cash flow, it’s a good idea to send out monthly statements detailing the
status of customers’ accounts to update them on what’s owed. If an account
remains outstanding, then it’s time to contact client personnel and let them
know you expect payment.
Consider Legal Action
If informal reminders don’t work, you may need to take
stronger action. First, send the client a demand letter that documents the fact
that your company has delivered goods or services, billed for them and the
client is now in breach of contract. The letter should say when payment is
required before further action is taken and what your next step will be — most
likely legal proceedings against the client.
Depending on the sum involved, it may be possible to pursue
your case in a small claims court, which handles suits involving lower dollar
amounts. You can represent yourself, which means you save attorney fees, and the
process is relatively speedy. The dollar amount limits vary, so check with your
local court to see if your case qualifies.
If you are owed a substantial amount, you may have to sue
the customer in civil court. This will likely be an expensive undertaking, but
the size of the debt may justify it. You will have to document the agreement
between you and the customer and that you held up your end by delivering the
promised goods or services.
One option for avoiding a court case is mediation. The two
sides present their cases to a mediator who helps them reach an agreement. If
the outstanding debt is the result of a dispute with a customer over the
original agreement, or over the quality of the goods or services delivered,
mediation may be a good step to consider.
Collection Agencies
If chasing small payments is becoming time consuming, you
may want to hire a debt collection agency. These agencies assume responsibility
for pursuing customers with overdue accounts, even bringing legal action against
them, if necessary. They usually take a percentage of the amounts they collect
as payment for their services. Before hiring an agency, check their references
to learn about their reputation, experience in your industry, collection methods
and success rate.
Consult a CPA
If you cannot collect the money you are owed, you may be
able to deduct the amount on your income tax return. Internal Revenue Service
Publications 535, Business Expense, and 550, Investment Income and Expenses,
explain the details. You may also want to report your experience to your local
chamber of commerce, the state credit bureau or the Better Business Bureau so
that other businesses and lenders will know about your problems with this
customer.
