How to Collect on a Bad Debt
Every creditor that allows consumers or clients to charge items on an account has some bad debt. This is just customary in the world of business. A customer may be very delinquent in paying their bills for many reasons. Creditors will try their best to collect on bad debts, but in the end, some of this will need to be written off on their tax forms to bad debt.
Small businesses can suffer greatly when trying to collect a debt. Debt collection is actually one of the main failing points of many businesses all throughout the country. It takes practice and some courage to be able to lessen the amount of late payments that others owe you and you will develop an understanding of when to expect that you won’t be paid from a customer or client. Effective communication skills can help you to spot problems before they become larger problems and get out of hand.
What are the Three Categories of Late Paying Clients and Customers?
Clients and customers all fall within one of three categories when they owe you a debt: clients and customers that will go to any length to avoid paying you, clients and customers that tend to have many payments all due to you at once and they only make sporadic payments and customers and clients that usually pay on time, but have some financial trouble and can’t pay you now.
Generally, you want all of your clients or customers to fall into the last two categories so you can try to work with them because they do have a history with you of making full or at least partial payments to you. You should devise a strategy and method to figure out which customers and clients fit into the first category and you will want to act much more quickly on these accounts. These accounts may need to be referred to a collections agency or you may want to consider litigation to collect your debts that they owe you.
Act Quickly and Stay Determined
The faster you act on debts owed to you and the more determined you are, the more likely you will recover your debts. Acting quickly ensures that you want to make certain to maintain your right to your money and staying determined can help you to get paid in full. Make certain to send bills and reminders to debtors on a regular basis. You don’t have to wait until month end to send an invoice or a past due notice, but you can send them immediately when an amount is past due.
A Roadmap to Business Collection Practices
Collection agencies are regulated through the Fair Debt Collection Practices Act which prohibits any actions they consider harassment or fraud, so you, as a business owner should also follow these practices that a debt collection agency does.
Don’t Harass Them
This applies to good customer service in any business and is a great legal policy as well. If a client or customer considers your actions to be harassing, you will most likely lose a customer and you could actually face a legal challenge in the process. You should call your debtors, but no more than once per day and you should never speak ill of a debtor or threaten them.
Short Phone Calls
You should keep your phone calls short. Stay on point and in focus so you are formal. Try not to make the person you speak to feel as if they are taking the phone call personally. Don’t ever imply that failure to make a payment is a personal failure. Stay calm and clear on each phone call and be clear that they owe you a debt that needs to be paid.
Writing a letter for payment to your clients or customers is called a demand letter. You should mail these in addition to making the phone calls and make sure to save copies of them. You can use these in the future if you enlist a collection agency.
Get a Collection Agency to Write Demand Letters
Collection agencies are professionals when it comes to getting money that is past due. This is why they write great demand letters. Many collection agencies will write demand letters on your behalf for a fixed fee. You will likely get a series of letters to mail with each one escalating in intensity.
Offer a Settlement
You can offer a settlement of a payment that is less than what a debtor owes you if you believe they will pay the lesser amount. This is a strategy if you have no real hope that you will be paid anything at all. You should make the settlement in a legal document that shows a payment amount of less that what is actually due will pay off the debt entirely.
Hire a Collection Agency
In many cases, a collection agency is your only hope of getting paid for a debt. They can charge up to about 50 percent of what they collect, but getting a partial of what is owed to you is better than getting nothing at all.
Small Claims Court
You can file a lawsuit to get the money that a debtor owes you. You may be able to receive the amount they owe you plus your filing fees. Small claims courts are designed to save you the money from an expensive attorney and additional court fees.
File a Lawsuit
If your client or customer owes you a considerable amount of money over what you can file for in small claims court and you don’t want to give a percentage to a collection agency, you can file a lawsuit to recover your debt. You will pay higher fees than in small claims court and you will need to pay an attorney so you should only file a lawsuit for a substantial debt owed to you.
These practices can help you to collect more of your debt from non-paying clients and customers and will also give you the knowledge of how to go about doing so in the correct manner. Be diligent and you may surprise yourself by what a great collector you can be.