Debt Collection Options for Businesses

Understanding small business debt collection

By Canaan Suitt, J.D. | Last updated on January 12, 2023

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Cash flow is a fundamental concern of any small business owner. Unpaid invoices are not just a source of stress for business owners. They can quickly strain a small business’s resources and ability to operate. 

When invoices go unpaid, business owners must take action to try to collect what’s owed. 

“There are all kinds of collection options available to unsecured trade vendors,” says Wisconsin debtor-creditors’ rights attorney Seth E. Dizard.  

This article will cover some of those options. 

However, as Dizard emphasizes, getting legal advice about your situation from an experienced lawyer is essential. The best debt collection strategy ultimately depends on your specific circumstances, including your business’s leverage and long-term relationship with the debtor. 

Have Effective Policies in Place 

Unfortunately, if you’re a small business owner, you will likely have customers who are late paying their invoices. 

Some of these customers are late due to legitimate financial pressures. These customers would pay if they could but are experiencing financial difficulties preventing them from doing so.  

Other customers intentionally delay paying their bills or never intend to pay.  

Since small businesses are highly likely to encounter late payments, it makes sense to have policies and plans ahead of time to deal with non-paying customers.  

Sometimes, making small changes to how you notify customers and collect payments can significantly reduce the number of late payments. For example, consider the following practices: 

  • Review unpaid invoices. Ensure your invoice records are accurate and you know which bills aren’t getting paid. Ensure the invoices you send to customers are clear about the amount owed, the due date, how to pay the bill, and other relevant information, such as account numbers. Sometimes, confusing or unclear invoices can result in customers inadvertently missing payments. 
  • Make it easy to pay. Consider setting up an online portal for payment. If a customer can pay electronically rather than having to send payment by mail, it may reduce delays in getting paid.  
  • Proactively notify customers. Send reminders of late bills promptly. Be sure to follow up with unpaying customers regularly. If a customer is unresponsive to one contact method (such as emails), try another (such as phone calls). Calling customers about unpaid bills is more direct and harder for them to avoid. 
  • Demand letters. When a customer is past due on their payment, send demand letters requesting payment. Be sure to keep a record of the letters you send in case you decide to take legal action. The letters can serve as evidence of your efforts to contact the unpaying customer. 

Try Collecting Debt Directly 

While it can be frustrating to not get paid and even put your business in a financially difficult position, you want to avoid any actions that will land you in legal trouble.  

So, when dealing with unpaying customers, strive to remain professional and avoid any harassing behaviors.  

Also be open to negotiating a solution with your customers. As mentioned above, some late-paying customers are acting in good faith—they are going through a difficult financial situation rather than intentionally avoiding payment.  

Assess the situation and consider if there is a mutually advantageous solution, such as an extended payment plan.  

Sometimes, a customer simply needs extra time to pay or regain their financial footing. If you can work out a repayment plan, it could strengthen the business relationship in the long run. 

Hire a Debt Collection Service 

If your business’s in-house debt collection is unsuccessful, consider outsourcing to a debt collection agency.  

Debt collectors are third parties who collect debt on behalf of creditors. There are a couple of options for how you can use a debt collection agency: 

  • To send collection letters on your behalf. Sometimes, getting a letter from a collection agency can make a customer take action. Many commercial debt collection companies will write collection letters for a fixed fee. This option means you keep the customer’s debt while getting the agency’s assistance. 
  • Turn the debt over to a collection agency. This means you transfer the unpaid debt to the collection agency. You no longer have to worry about trying to collect the debt on your own. While this can be advantageous, it’s often the last resort since if an agency successfully collects the debt, it will only pay the business 50 percent of what it collects. Getting at least half may be better than getting nothing, but you want to pursue this option only when you’re sure you won’t get paid otherwise. 

Debt collection agencies are subject to the federal Fair Debt Collection Practices Act (FDCPA) regulations. The FDCPA prohibits debt collection professionals from harassing, deceptive, or unfair practices. 

Under rules from the Consumer Financial Protection Bureau (CFPB), debt collection agencies must also send debtors written notice about their debts upon first contact. 

The notice should include basic information such as the name of the creditor, the agency’s contact information (phone number, mailing address), the amount of the debt owed, the due date, how to pay the debt, and how to dispute the debt. 

Read this article to learn more about debt collection agencies and the FDCPA. 

To pick a good debt collection agency, consider the following: 

  • What is their success rate? 
  • Are they accredited by reputable organizations such as the Association of Credit and Collection Professionals
  • What is the agency’s Better Business Bureau record? 
  • What debt recovery options does the agency offer? 
  • What does the agency’s pricing for services look like? Do they charge fixed fees? Are there any upfront costs?  

Take Legal Action 

If debt collection efforts fail, you can file a lawsuit against the debtor. Before taking any legal action, you should speak with an attorney about your options.  

The law is complex, and the procedure for filing a lawsuit can be time-consuming and complicated. A lawyer will provide the needed expertise to ensure the process goes smoothly. 

One of the biggest questions you’ll want to discuss with a lawyer is whether pursuing a lawsuit is financially worthwhile. How much will it cost to sue? If you win, will the debtor have assets sufficient to cover their debts, or will you come up dry? 

Depending on the amount of debt involved, you might also consider filing in your local small claims court.  

Small claims courts handle cases involving relatively small amounts of money. State laws set the limit on the amount these courts can handle. In many states, it’s under $10,000.  

A significant benefit of small claims court is that the process of filing a claim is much more straightforward and less time-consuming than a traditional civil lawsuit. You may not need to have a lawyer handle the case.  

This could be a good option if the amount you’re seeking is under your state’s limit for small claims courts.  

Even if you go through small claims court, it’s wise to speak with a lawyer first to ensure you’re taking the best action. “If you act on your own, to save money, you’re really only lucky if you don’t end up paying a whole heck of a lot more in the long run–to have a lawyer fix a problem that exists rather than planning for that problem to prevent it,” says Dizard. 

Questions for an Attorney 

Many attorneys provide free initial consultations to prospective clients. These meetings let the attorney hear about your case and allow you to get legal advice while determining if the attorney meets your needs. 

To see whether an attorney is a good fit, ask informed questions such as: 

  • What are your attorney’s fees and billing options? 
  • What are the steps in the debt collection process? 
  • Should I try to work out a plan with a customer or take legal action? 
  • What are the pros and cons of a lawsuit? 
  • Should I consider small claims court? 

It is essential to approach the right type of attorney—someone who can give you legal help through your entire case. You can visit the Super Lawyers directory and use the search box to find a lawyer based on your legal issue or location.  

For legal assistance with collection issues, search for a collections attorney.

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