What are the Best Tips for Business Debt Collection?

Paul Woods

The best business debt collection method is the one that gets the business paid off in the shortest time, with the least effort and at the lowest cost. Business debt collection can range from something as simple and easy as sending a second invoice to something as complex and costly as litigation. Tips for collecting include implementing a system to vet customers before extending payment options to them; developing a system to easily and inexpensively remind debtors of outstanding obligation; and, finally, knowing at what point the cost of collecting the debt exceeds the benefit.

An attorney will draft a debt collection letter for the client to sign in some cases.
An attorney will draft a debt collection letter for the client to sign in some cases.

Among the most effective tips for business debt collection is for a firm to establish a system of evaluating the credit worthiness of those to whom it will extend payment terms. The system should be inexpensive to maintain so as not to offset the benefit of prompt bill collection. Additionally, for customers who do not pay business debts, the system should be able to flag them to avoid extending credit in the future.

When customers are late in paying, often a reminder will suffice. An accounts receivable system can easily be adapted to send a second invoice at a given number of days after the first invoice has been sent and payment has not been received. It is typical as well to provide an incentive for customers to pay late bills, such as applying a late payment penalty.

Before moving on to more time- and cost-intensive business debt collection methods, a firm can consider a personal call to the debtor if that is allowed by local laws. This personal contact often results in prompt payment. If it does not, it can serve to explain why the payment is late and start a payment process.

Additional business debt collection remedies begin to get more expensive at this point. Methods include having an attorney write a letter demanding payment, which need not be costly if the company has in-house counsel. Using a debt collection agency will typically cost a large percentage of the debt as payment to the agency. In the extreme, going to court to collect a large unpaid business debt can entail substantial legal fees with an uncertain outcome.

Offering to negotiate with the nonpaying customer before undertaking more drastic steps may be wise. At this point, it is important the business have a system in place to value the benefit of a reduced repayment versus the cost of collection agencies or court action. It is also important that the customer vetting process accommodate the information resulting from a negotiated repayment so the customer can be avoided in the future, required to pay cash up front or offered more stringent credit terms.

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