Chasing debtors is an unpleasant fact of life for most small businesses. Unless you can settle outstanding payments quickly, before you know it, you can be facing a serious cashflow hole.
Here are nine tips that will help you collect what your business is owed, reduce the time and energy spent chasing cash, and make debt collection just another business function.
A word to the wise, though: a phone call or a reminder is often all that is necessary, and it can preserve customer relationships. Many businesses find it better to escalate only as necessary.
1. Ensure your payment terms are fair, clear and in writing
Effective accounting and billing procedures can prevent problems before they occur.
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Make sure that payment terms are stated upfront, clearly and in writing. Then have a regular billing and follow-up schedule that follows those terms to the tee.
Make sure your customer understands payment terms at the time of the transaction.
2. Invoice as early as possible
Just as you have a billing schedule, assume that your customer has a schedule for processing invoices.
A prompt invoice is less likely to be forgotten and more likely to be paid on an earlier schedule.
3. Disincentivise late payments by charging interest
Make sure these interest charges are in line with customary practice in your industry and geographic area and are fully disclosed on the initial invoice.
Be sure to enforce them consistently.
4. Incentivise early payments by giving discounts
Everyone loves a discount!
To make this an effective practice for early payments, make sure that this too is fully disclosed on the initial invoice and consistently applied.
5. Solidify your follow-up process
Ensure you have a follow-up process for overdue payments in place. This should be part of your basic accounting and billing practice.
Plan for the levels of escalation with specific times — 30 days overdue, 60 days, 90 days and so on.
6. Create payment plans
Setting up a payment plan may be the best approach for good customers with unexpected cashflow problems.
This is a way for you to recover your outstanding debts while maintaining good relations and avoiding the expense of legal action.
Make sure the plan is realistic for the debtor, but remember to include customary interest charges for late payments.
This option is for your best customers — not everyone.
7. Engage a debt collection agency
If informal methods fail, but the debt is too small to take legal action, the next step may be to hire a debt collection agency and transfer the account to them for collection.
Some will often offer an instant payment on unpaid invoices, which can be a welcome relief for a smaller or newer business.
8. Start a claim in your local court
Before you resort to the small claims court, you should send a formal letter of intent to let the debtor know that you intend to take legal action. Make a demand for payment. This may be enough.
If you need the court’s help to settle a dispute, the way to proceed is to file a statement of claim. A statement of claim is a filing with the court that identifies the legal issue that needs to be resolved and the parties involved. This is done by filling out a form, available either online or from the court, and filing it either in person or online.
If the debtor is outside NSW, outside Australia or is represented by an attorney, there may be other procedural requirements.
Otherwise, you should seek the advice of the small claims court or your attorney.
The local court has two divisions to determine civil cases: the small claims division hears claims up to $20,000 and the general division hears claims over $20,000 (up to $100,000).
If the amount in dispute exceeds $20,000, you would be foolish to proceed without legal representation. The stakes are much too high.
9. Write off the bad debt
There is no shame here. Sometimes this is just smart business practice.
If the cost of getting paid is more than you are likely to recover, then it may be better to write it off and take a bad debt tax deduction.
Chalk it up to the cost of a painful education, and don’t deal with that customer again.