Small Business Debt Collection

A small business debt collection policy is the first step in making sure that accounts receivables turn into money in the bank. The phrase, "accounts receivables," refers to money owed by customers to the company. Though most entrepreneurs don't go through the hard work of planning and launching new companies to become bankers, that is essentially what happens when credit is extended to customers. If a prospective entrepreneur finds himself in the enviable position of choosing between several possible business opportunities, he will base his final decision on which one to choose on several factors. One of those factors should be the extent to which accounts receivables are part of the prospective venture. For example, some companies do not provide any credit at all to their customers. The customer pays for the goods and services when the sale is made. But other industries will bill the customer. Until that bill is paid, the owed money is considered as part of the accounts receivable. The prospective entrepreneur should determine how much time he wants to spend on his small business debt collection efforts.

Small business development experts advise entrepreneurs and new owners to establish credit policies and procedures. These should be clearly written in procedure manual and then consistently followed. Many industries have a credit policies standard that the entrepreneur can use as a template for his own company. This information will probably be available through the industry's association and may even be found on the association's website. This information can help the entrepreneur develop a small business debt collection policy that fits customer's expectations for that particular industry, but also meets the specific needs of the entrepreneur's company. Part of the policy should include a credit application form for customers to sign. Here again, many sample forms can be found by doing a little bit of research. A provision regarding late payment fees can be included in the agreement as an incentive for customers to make timely payments. The federal Truth-in-Lending Act regulates how much interest can be charged for late payments and the laws vary in the individual states. The contract and/or credit application may also include a provision commonly known as a "deadbeat clause." This states that the customer is responsible for any legal fees involved in collecting an overdue bill. The entrepreneur may want an attorney to review his small business debt collection procedures manual to ensure that all state and federal laws are being appropriately followed before implementing the credit policy.

If accounts receivables are a normal part of doing business, the entrepreneur is well-advised to turn over this function to one individual who can be properly trained to handle it appropriately. Of course, as the business grows, the accounts receivables staff can grow along with it. But the important principle is to have specific people dedicated to this task instead of having a hodge-podge of employees who take care of collecting payments when they don't have anything else to do. This individual can also take care of running credit reports on prospective customers and checking references before credit is extended. Just doing these two tasks upfront may eliminate most overdue accounts. Credit can be refused to prospective customers who have a poor track record of paying their bills. Obviously, handling the small business debt collection function of the business is too important to the company's bottom line for procrastination or indifference to be allowed. As the Proverbs writer said: "Give instruction to a wise man, and he will be yet wiser: teach a just man, and he will increase in learning. The fear of the LORD is the beginning of wisdom: and the knowledge of the holy is understanding" (Proverbs 9:9-10). The properly trained staff will have an established monitoring system and the appropriate steps in place for effectively handling the accounts receivables function for the business.

Experts advise that the steps for collecting overdue accounts be specifically planned so that each contact becomes more assertive. For example, when an account is thirty days overdue, a friendly reminder may be all that's needed. The customer truly may have overlooked paying the bill and sending out a reminder will result in payment of the bill. The next step in the small business debt collection policy may be to send out a second reminder two months after the bill's original due date. This contact still needs to be professional, but may be more assertive than a friendly reminder. A third reminder may be scheduled for three months. For assistance in this part of the collection's policy, the entrepreneur or designated staff can find numerous sample copies of collection letters at online websites that specialize in these types issues. Small business development centers and local chambers of commerce may also provide helpful resources.

The most difficult decision is deciding when to turn overdue accounts to a small business debt collection agency. But here again, the decision needs to be made when setting up policies and procedures for handling the accounts receivables. This way, the staff knows exactly how to handle each account in an objective and fair manner; all customers are treated the same way. The entrepreneur should be sure that the collections agency that takes over his unpaid accounts is licensed and operates under the restrictions and limitations of the federal Fair Debt Collection Practices Act (FDCPA). Though this can be a difficult step to take, the entrepreneur needs to know when to cut losses. A client who doesn't pay is seldom a client worth having. By establishing clear procedures on accounts receivables before the business's first day of operation, the entrepreneur is demonstrating a commitment to the venture's success. As a review, all policies and provisions regarding late payment fees and legal fees should be included in a customer's contract and credit application. The small business debt collection manual should indicate the appropriate steps for collecting on overdue accounts so that the properly trained staff can monitor the accounts receivable in an orderly and productive fashion.



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