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.
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.