Small Business Credit and Collections: Top 5 Missteps

Posted by Marilyn Miller on November 16, 2020  /   Posted in Uncategorized

Small business credit and collections is the process of juggling giving customers credit and making sure that customers stick to the credit terms by paying on time. It is no accident that the words “credit” and “collections” are often used together, and seen as similar functions. How well you put together a customer credit arrangement will drive how well it works. In a perfect world, every customer pays on time. In the real world, you will sometimes have to follow up and collect the money that is due for you.

Unfortunately, busy small business owners do not pay enough attention to credit and collections and do not manage the process until it is too late.

In my experience here are the top 5 real-life small business credit and collections missteps:
Number One: Insufficient information on credit customers.

Imagine borrowing money from a bank and having to only give your name and cell phone number. A bank gathers information on you, and makes an informed decision as to your creditworthiness. While you may not be able or willing to make the type of credit investigation and determination a bank would make, you can at least gather basic information on your customer using a credit application.

A customer once hired me to collect a $ 15,000 debt. They had been asked to do a very large commercial job in another state. The job was the biggest they had ever done, and they were very excited. So excited in fact, that they started work on the project with only the first name and cell phone of the man requesting the work. Needless to say, they did not get paid. We were able to research and find more contact information and obtain payment, but it took time and cost our customer money.

Number Two: Poor documentation.

If you are going to give customers credit, you must clearly outline your credit terms in writing, and have customer sign their agreement. A customer credit contract will be your best friend.

I have heard small “mom and pop” customers tell me that they not want a formal written agreement. They feel that asking a new customer to sign an agreement that outlines payment terms and also lists the consequences of non-payment is a negative way to begin a relationship. The prefer “handshake agreements” based on trust.

In truth, clearly communicating credit terms in writing in advance of a transaction is exactly the way to begin a business relationship. Start off on the right foot, and you can save problems down the road.

Need I tell you how many collections I have made based on handshake agreements? Often, contract terms are conveyed and agreed to verbally. While oral contracts are valid in most states, an oral contract subjects you to the memory of another. Trust me, in a dispute, an angry customer will remember it differently that you do.

Number Three: No system for accounts receivable management

Your accounts receivables will not manage themselves. If you do not have an aging report,  you must put one together immediately and live by it. An aging report lists customer invoices by their due date, and will tell you at a glance how long much is due you, and how long the customer has owed it to you.

Your next step is to design and program to follow up with customers at each landmark date, usually 30, 60, 90 and over 90 days past due. Assign responsibility for each contact, whether it be a phone call or collection letter.

Once you have your plan in place, stick to it! Again, manage your accounts receivable or they will manage you.

Number Four: Using Small Claims Court incorrectly

Small Claims Court exists to allow business owners the opportunity to take their cases directly to court. An attorney can be used, but is not required. Small claims court handle cases where the amount of the claim is under a certain dollar amount, which varies by state. In Maine, the limit is $ 6,000. In New Hampshire, it is $10,000.

In many instances, Small Claims Court is a great option for collection. The fees are generally low, and often people “wake up” and pay when served with a small claims suit. If you do proceed to trial, and if you do win, you are awarded a judgment. The Court does not collect the money for you. You have to collect it on your own and that can take more time and cost more money.

Not all debts make good court cases. Does the person or company have assets to attach? Are you certain you are suing the right entity? Does the dollar amount of the claim make the cost and effort worthwhile?

Last week, I received a phone call from a prospect who had been owed $ 2,300. Their attorney took the case to small claims court and charged them $ 1,500. The Court awarded a judgment for the $ 2,300 plus costs (around $150). The attorney advised that they were not able to collect the debt, and suggested hiring a collection agency. There is no underlying contract for attorney fees or costs of collection and the Court did not award attorney fees, so I had to tell this poor business owner that I could not collect the money he spent on his attorney, who obtained the judgment, but who has not interest in doing the hard work of collecting the debt.

Number Five: Waiting to long to bring in experts.

While you should attempt to collect accounts receivable on your own, there is a limit to what you can do. If you wait too long, you take the risk that your customer will incur more debt, move or that something else will happen to make the debt more difficult or even impossible to collect.

Set the limit of how long you are willing to wait for your money, and stand by it. Recently a customer submitted a $ 100.00 debt to me for collection. They advised that they had sent monthly notices to the customer for over a year.  If you do not receive any response within 90 days, get expert help. The longer you wait, the higher fee a collection agency will charge.

Delay also has some less obvious but very real impact on your business, perhaps including a higher cost of collection.

The good news is that these small business credit and collections blunders are all preventable. Planning, strategy and a persistence go a long way, and will benefit your business in the long run.

Accounts Receivable: Breaking Up is Hard to Do

Posted by Marilyn Miller on November 11, 2020  /   Posted in Uncategorized

Accounts receivable are an asset, but in order to be of value, they have to be converted to cash. Although some companies may enter into factoring arrangements and pledge receivables, most cannot. So basically you cannot use receivables to pay your employees or buy new equipment.

What is accounts receivable?

Accounts receivable (A/R) are defined as balances due services or product that have been provided or delivered. The definition also states that that these balances have not yet been paid. They are simply a promise to be paid. Once you are paid, and only when you are paid, do you have income. Too many small business owners confuse accounts receivables with income.

Small business owners all too often delay hiring a collection agency because they have fallen in love with their receivables, and believe those nice big numbers, even when the accounts receivable are not yet collected and yes, even if they are a year delinquent.

My advice is always the same: Break up with your receivables, even if breakin’ up is hard to do.
You must have a plan for managing your accounts receivables.

If you do not manage your A/R, they will manage you. Your cash flow will suffer. You will find there is not enough money to pay your creditors, your employees, or yourself. A small business plan for accounts receivable management should include a plan and timetable to reach out to delinquent customers. The timetable must include a deadline for the process of forwarding delinquent customers for third-party collection and/or litigation. Your approach must be consistent and you must commit to it.

The math is simple.

If you are holding off hiring a collection agency because you are put off by the collection agency rate, you are only hurting yourself. Remember, you have not been paid. Once an account is delinquent you have in effect suffered a loss and you have nothing.

0 Times any rate is always 0

Switch your thinking to recovering as much as you can. If you plan for it using a customer contract, you may be able to recover some of your costs of collection.

Some breakups are harder than others. But in the case of your accounts receivable, you have nothing to lose, and everything to gain.

Collection Agencies: What We Do (vs What You Think We Do)

Posted by Marilyn Miller on November 10, 2020  /   Posted in Uncategorized

Collection agency. When I tell people I run one, I usually hear, “Hmm…interesting”, as in “How do I get away from this person” or “How do I feign interest when I cannot believe anyone would do that for a living.  That, in my opinion, is championing the right of my small business customers to be paid for the work they do.

I do not believe that the negative reactions I may receive have much to do with people owing money as much as people reacting to the many negative stereotypes (some of them, sadly true) of what a collection agency does. Other people simply wish to avoid conflict at any cost, and cannot imagine that I spend my day trying to get people to pay what they do not want to pay.  I either hear, “You are too nice to be a debt collector” or “Oh, a leg breaker, eh?”

Well first and foremost, there is no leg breaking. Although as I have stated, there are some bad players in the collection industry, state licensing agencies and the laws against abusive collection agency tactics have improved the industry. Trade organizations such as ACA International provide education and guidance on professional standards.

Many people believe all a collection agency does is make a few calls and report debts to the credit bureaus. Calls and reporting are only part of the process.

So what do I do all day?

I research collection files to find new information. A collection agency has specialized tools to find debtors and their assets.

I review bills with consumers to communicate and verify how the debt was created. For example, I spend a good deal of time explaining medical and dental bills in terms of insurance policy out of pocket expenses, such as coinsurance and deductibles.

I negotiate and document payment plans.  I keep those plans on track.

I assist my small business customers make better customer credit decisions, and explain how documentation is key to avoiding problems down the road.

Are some collections difficult? Of course.

The key to successful debt collection is persistence and professionalism. No one likes to owe money. A collection agency advocates for their clients and their right to be paid, while respecting the rights of the people who owe the debt. It is a fine balance.

Small Business Debt Collection: It is All About Communication

Posted by Marilyn Miller on November 09, 2020  /   Posted in Uncategorized

Small business debt collection cannot be accomplished without communication. Whether you are collecting the debt in-house or hire a collection agency, what you say and when you say it makes all the difference.


Now, communication should start from the very beginning of a relationship with a contract or at very least some documentation of the terms of the delivery of your product or service. Today though, we will focus on the role of communication in the recovery of past due balances.

The novel Code Name: William Tell by Colonel Don Wilson describes a fictional president who comes to a peaceful solution to a national crisis by letting his mind expand to consider all possibilities. His character muses, “there is no last word in diplomacy”.

Diplomacy – in the form of clear communication- is the essence of collection.  Not threatening, but communication, talking, diplomacy.  Your problem is that the individual or business is not paying, and probably not talking either.  The initial step is not to threaten, but to open a hailing frequency, find out what the problem is.

With commercial small business debt collection you would be surprised how many times the reason for nonpayment is simply  that the invoices were not in the right department.  Are you in contact with the person who approves and pays bills? If not, get to that person, and getting paid is much easier.


With consumer debt collection, lack of communication is also often a factor in why bills do not get paid. Are your invoices clear and do they detail all your payments and charges. With medical and dental debt collection, it is often a matter of helping patients understand how their insurance policy works.

The most important aspect of credit management is communicating with the people who owe you money.  An initial phone call should follow an invoice after a completed job.  The communication link between you and the account starts on a positive note from the outset.  You can update contact information. The call will not only help with payment but also address any issues that could be obstacles to payment. For example, a client of ours, a well water treatment contractor, recently phoned a customer about a past due bill for a water sampling. The customer explained that she had not received the results of the test (an oversight by company) and when provided with the results, instantly provided payment.

Continue conversations with your customers, making sure your invoices have the terms clearly printed on them, and advise your customers how and when you expect to get paid.  Remember, a customer still wants something from you.  They want to use the credit you extend because it is good for their finances.  You as the creditor then assume the responsibility of its management.  Credit will not manage itself.

People respond to people.   There is a reason they aren’t paying.  The only way to find out is to pick up the phone and ask.

There are times when you cannot communicate with someone, because they stop responding to you, and you will need to outsource to your collection agency. But the more you make your small business debt collection about communication, the less likely it will be that you have to pay your collection agency to recover for you.

Do Not Discard Your Accounts Receivables

Posted by Marilyn Miller on November 04, 2020  /   Posted in Uncategorized

This past weekend, I took a long walk around my neighborhood, the West End of Portland, Maine. It was one of those last brisk, sunny autumn days before ice covers the brick sidewalks and makes exploring difficult.

Since we are still in the middle of a pandemic, virtually everyone we passed kept their distance, and were of course wearing facemasks to help slow the spread of the virus. I am grateful that my Portland neighbors are responsible and care for their fellow citizens.

However, I could not help but notice a number of discarded broken masks on the ground. I thought it a shame that the wearer did not have the courtesy to dispose of the masks properly.

And, as I usually do, I made the mental leap to thinking about small business owners and their accounts receivable. It may seem like the king of all non sequiturs, but bear with me.

Just as some people discarded masks when they were no longer needed, too many small business owners essentially  “throw away” their accounts receivables if they do not manage them. Don’t believe me? Ask a couple of small business owners if they have aging report. Ask them how many customers are over 90 days past due. Ask them if they have a process to pursue delinquent customers and collect the money that is due to them.

Some business owners will claim they “write off” the debt when in fact they simply ignore it. Even if they actually do write off the debt the tax benefits to most small businesses is minimal at best. On the other hand, collecting the money you have already earned can really boost your cash flow. 

Accounts receivable management should be as integral a procedure as sales or operations. You can successfully manage your slow paying customers without losing them if you communicate effectively and make it easy for people to pay you by providing them different ways to pay. 

As for customers who simply ignore your invoices, it is important to send the message that you intend to be paid. Crafting an effective collection letter is a good start. If your efforts do not succeed, do not hesitate to bring in the experts and hire a collection agency

You would not have done the work or sold the product if you knew you were not going to be paid for it. If you respect your accounts receivable by managing them and communicating with your customers about the money they owe you, you will find they respect you right back with more on time payments. 



Debt Collection Does Not Have to be Scary

Posted by Marilyn Miller on October 29, 2020  /   Posted in Uncategorized

Debt collection is one of those tasks that many small businesses owners avoid for a number of reasons.

Some people do not even realize that they have an issuing with aging receivables because they have procedures in place to monitor them. It is important to review accounts receivables at least monthly, and have a plan to follow up with delinquent customers. The longer a receivable is outstanding, the greater chance it will be difficult to recover.

Let’s face it, debt collection can be confrontational, and confrontation can be scary. However it does not have to be.

First, make sure that you are very clear of your expectations for payment. Clearly communicate the amount due, due date and accepted methods of payment. Make it easy for people to pay you by giving them several options. Know your customers. My dad, who is 97 pays all his bills with checks, while my 27 year old son uses Venmo and ApplePay. 

Once you have identified your delinquent customers, begin with a “gentle reminder” collection letter. You will be amazed how well a letter will work for you.

Your next step should be to email or call your customers. Email is less confrontational, but a phone call can be more effective. To make your phone call less difficult, script out what you are going to say. Begin your call by thanking the customer for choosing your business, and asking them if they are satisfied. Then talk about the money. Be ready and willing to work with them to set up a payment plan. Document the plan and make sure the customer agrees to it in writing. 

If, after several months, a customer is still not responding, do not hesitate to hire a collection agency. If you have made a good faith attempt to reach a customer, do not feel bad sending them to collections. You would not have provided the product or service if you knew you would not be paid for it. 

Make debt collection a regular part of your business activities. The more you do it, the less scary it will be.

Happy Halloween from United Obligations!


Accounts Receivable Management: Not a Spectator Sport

Posted by Marilyn Miller on October 27, 2020  /   Posted in Uncategorized

Accounts receivable management is essential to the financial health of a small business. All too often small business owners forego accounts receivable management, claiming that they are too busy with sales or day to day operations.

Everything is fine, they will say. We grew our sales by 50% this past year, and we have to focus on servicing our customers. If we keep them happy, they will pay us. 

Famous last words. All the sales in the world mean nothing if they are only sales on paper, that is, if you are not actually receiving money. I have seen too many business get into a cash bind because they were not paying attention to receivables.

Certainly happy customers are more likely to pay you than dissatisfied customers. However, I have built a business on collecting from people who have never disputed the product or service they received.

Design an accounts receivable program and stick to it.

Do you have an aging report? If not, you must get one immediately.  An aging report shows you which customers owe you money, and how long each customer account has gone unpaid.  It is likely that you already have the software to construct an aging report. If you do not, accounting software such as QuickBooks will do the trick.

Once you have your aging report in place, live with it. Review weekly and come up with a plan to contact delinquent customers. Bring in key staff and assign weekly tasks for follow up. I once had a client tell me that they were in such a cash bind that they were having trouble paying their bills. They began small group meetings every Friday that lasted only 30 minutes but reviewed delinquent customers, which steps had been taken, and what the next step should be.  Just paying to attention and calling customers or sending them a collection letter made a dramatic difference.

We recommend, as a rule, a 90-day process for accounts receivable management:

After delivery of product or service – Customer service call to ask if customer happy service. Use the opportunity to confirm billing information.

  • Thirty days – Friendly reminder letter or notice
  • Forty five days – friendly reminder phone call
  • Sixty days – Second letter. You can draft a completely different letter or simply send the first letter with a stamped, “Second Notice” on it. Be creative here. Use a different color paper, or a sticker in a bright color that lets them know they need to pay you.
  • Seventy- five days – Phone call from management.
  • Ninety days – Final notice to pay within ten days or be turned over for collection.

You may want to wait a little longer, say 120 days for some customers, especially if they represent repeat business to you. You may forego outside collection and take them to Small Claims Court yourself.

The specifics are not as important as having a process and having the discipline to stick with the plan. Consistency is key.

Even if you are lucky to have an accounts receivable department, do not sit back and assume everything is fine. Get involved. Lend support. Let the accounts receivable team know you are available to help when needed. Let them know they are a vital part of your company.

Accounts receivable management is not a spectator sport!

Collection Agency or Your Lyin’ Eyes?

Posted by Marilyn Miller on October 19, 2020  /   Posted in Uncategorized

“Who ya gonna believe, me or your lyin’ eyes?” – Chico Marx in Duck Soup

Your collection agency is a valuable business partner. When you hire a collection agency, you do so not only to improve your cash flow by recovering bad debt, but also to save you time. A collection agency focuses on only collecting bad debt, and they have the tools and skills needed to do so.

So, let them do their job. While collecting bad debt is not magic, there is an art to it, and it is not for everyone. I believe that you should try to collect bad debt on your own, but if you have not been successful in 90 days, bring in the experts.

Once you place the file with your collection agency, trust their advice. In many cases, they have done research and they know the best way to get the job done. Since collection agencies work with a contingency fee basis, the are certainly going to advise a strategy that has the best chance of getting you paid.

Here are a few examples from our files:

Our client is owed $5,000. Their customer is a sole proprietor with a small business and assets.  We have researched and know that he is getting ready to retire. He also owes a great deal of money to other creditors. Our advice was to proceed immediately to Small Claims Court to obtain a judgment and secure their debt. It is frustrating to me that my client, who hired me to recover bad debt, is uncertain, and wants to take some time to think about it. I am not sure if the wait is because it means they will recover a little less money, or if they are worried about going to Court, but I hope they decide soon so that we can act. If we do not move now, we will wind up behind many other creditors, or the customer will sell his assets and move away, and there will not be anything to collect

For another client, I recommended Small Claims Court again, because the debt is almost 6 years old, and about to age beyond the statute of limitations. He has not responded to any requests for payment. He appears to have the means to pay the bill. I laid the facts out to my client and he told me to go ahead, because he trusted my experience and knowledge. He sees the collection of the file as our mutual goal.

There you have it – two very collectible files – one that will pay and another that may go by the wayside.

An aging receivable is not worth anything unless it can be converted to cash. Your collection agency knows how to do that. They would never tell you how to sell your product or deliver your service. So, when your lyin’ eyes tell you the bad debt on your books is valuable, don’t believe them.

Credit Bureau Reporting and Debt Collection: The Upside and the Downside

Posted by Marilyn Miller on October 15, 2020  /   Posted in Uncategorized

Credit bureau reporting is often cited as the key benefit of hiring a collection agency.  A common belief is that if you report a debt to one or all three of the credit reporting agencies (Transunion, Experian and Equifax) it will assure that a consumer will pay a bill. If that were the case, why do 30% of Americans have credit scores under 600, which is considered “fair” credit at best, and poor or subprime, at best? There are also people who have no credit score at all, because they do have the need for credit. Does anyone really believe that these people will be motivated to pay a delinquent bill if they are threatened that the debt will be reported against their credit file?

So what is are the upsides, or benefits  of credit reporting as respects debt collection?

Credit reporting is definitely a tool that collection agencies use. There are times when people decide to clean up their credit because they are buying a home, or just want to be more financially responsible. At those times, consumers will pay the debts that are on their credit reports.

So does credit reporting actually help collect a debt? It can motivate your some people to pay the bill so as to avoid the impact to their credit score. Also, there is a chance that even if your customer does not care about their credit score today, they will at some point in the future. Federal and state laws vary on how long debts can be reported, but the “future” could be years from now though. How long do you want to wait? What is your collection agency doing in the meantime?

When a collection agency reports a debt, it makes their customers, the original creditors feel as if the delinquent customer has not “gotten away” with not paying their debt. The only problem with that thinking is that the delinquent customer already has already gotten away with it!  Credit reporting used for revenge is just silly.  Focus not on getting even, but on recovery – on getting paid.

Which brings me to the downside of credit bureau reporting…

Without even taking into account the security risks of data breach, credit reporting does have its downsides, mostly because people overestimate its effect on debt collection. Credit bueau reporting is only one tool a collection agency can use to collect a debt. My opinion is that many collection agencies overuse it, Ask your collection agency what they will do to recover for you. If credit bureau reporting is the first thing they tell you, it likely means that is pretty much all they are doing. Perhaps they are sending a letter and making a few calls, but after a month or so, the debt is parked on your customer’s credit report and nothing new happens.

In my experience, most people sent to collections are not primarily concerned with their credit scores. It may be an issue, but it is not the most important issue. The most important issue, the one we hear again and again is just not having the ability to pay. Therefore it makes sense to work with people and get them into affordable payment plans, rather than punish them for something that may be totally out of their control. Even for those customers that intentionally stiff you, your focus should not be on getting even with them. Your goal, and the goal of your collection agency should be to recover as much money as possible. It can be done without credit reporting. I know – I have been doing it for 14 years.

As of July 1, 2017, credit reporting agencies were also required to remove many debts that did not have key identifying information on such as social security number and date of birth. Going forward, if do not have complete information on customers, the credit bureaus may be unable to accept reportings. The impact of medical debt on a credit score has also been minimized So an active plan for recovery becomes even more important.

Credit reporting and debt collection, therefore, are two distinct things. One is a tool that may or may not work, and the other is a process – an action word. What actions you and your collection agency take will make the difference in getting you paid.

Why My Clients Get Mad at Me and Why They Shouldn’t

Posted by Marilyn Miller on October 13, 2020  /   Posted in Uncategorized

Debt collection for a small business is a team sport. If one person tries to do it alone, the results will be limited. Worse still, if a team is not in sync and does not communicate, they work at cross purposes and chaos reigns.

When I perform debt collection for a small business, I want to be a member of their team and work closely with them to get the best results. Most of the time, it works well.

Most third-party collection agencies work on a contingency basis which means that they take a percentage of sums recovered. They make no money unless they get results. When a collection agency agrees to work to recover a delinquent debt, they take a leap of faith. The agency takes no money upfront because they believe they can recover the debt, and therefore earn a commission.

Imagine pricing your product before you know how much it is going to cost you.

When a collection agency begins to collect a debt, they do not know how much time and effort it will take. It could be one phone call or letter or many. There is simply no way to know. A collection agency generally charges more for older debts than newer ones, but even very recent debts can be difficult to collect. Agencies generally work to recover enough to some money for their customers and make a profit doing so.

Some agencies charge a small per file fee for collection. I have taken several accounts from agencies that use this approach, and have found that their percentage of debt recovered is pitiful. Why? Because if an agency only charges, say $20.00 to collect a debt, they can only afford to spend $20.00 (at most!) collecting it, which is to say, you get very little for your money. Plus you pay it up front, versus the contingent approach where you have no upfront expenditure. The contingency approach, in my opinion, is the only way to go.

So why do customers get mad at me?

Sometimes a customer believes that by charging a commission to recover money for them, I am taking some of “their money”. I get it – it stinks not to get paid. Your collection agency, however is not your enemy. They did not cause the debt to become delinquent.

Some customers get mad because they believe my rate is too high. Usually in this case, they have tried a per file fee, or a low rate, and gotten poor results. The debt has aged, making it more difficult to collect. My rate when I am not the first agency involved is higher, which is standard for the debt collection agency.

Another reason for a higher rate is that customers wait far too long before hiring me. I want my customers to do everything they can on their own, but after 90 days, it is time to bring in the experts.

Lastly, customers are upset when I have to tell them that I cannot add my fees to the debt. I can do it in some cases but not in others. Three factors drive my ability to pass costs along: contract, type of collection and state laws.

Without a contract, I cannot and will not add collection costs to the debt. A customer must agree in advance to pay any collection fees.  If you wait until after you have done the work, to tell them they are going to pay your costs, it is too late. The agreement must be in writing.

The laws vary for collection costs on the type of debt, whether or not they are consumer (business to consumer) versus commercial (business to business). State laws also may limit the costs that can be passed on.

For example, Maine allows costs to be passed along to consumers if there is a contract, and if the debt is not a “credit transaction”, such as an auto loan or credit card. Connecticut, on the other hand, allows only 15% of the total owed to be passed along to consumers. In all cases however, no contract means no fees can be recovered.

So what should customers do instead of being mad at me?

A contract is the single best debt collection tool. Even a simple email that states your price and terms for payment, and states that you will pass along any collection costs works as long as the customer emails back their agreement.

Perhaps it is not possible for small business owners to always get a signed customer contract. I do know that they can be doing it more often than they are currently doing. If you are too busy or do not feel like bothering to get a contract, you cannot blame your collection agency for not recovering the costs.

If you wait too long, you cannot complain about having a higher collection rate. If you focus solely on rate, you are making mistake, as rate is only one consideration in hiring a collection agency.

So, don’t get mad. Get those contracts. Come up with a system to attempt in-house collection for 90 days and then get it off to me. I am passionate about your right to be paid.

Don’t get mad. Get paid. I can help.

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