Does every small business not have an active plan to recover bad debt? Good question! They certainly do need to focus on their accounts receivables just as they focus on new business sales and customer service. Nothing will hurt cash flow more than slow-paying or non-paying customers. Some business owners are hesitant to tackle their accounts receivables because of some old myths about cash, credit and bad debt collection.
Here is the truth about some common myths about credit and collections. Some items are linked to detailed articles on the subject. Check them out!
- Accounts Receivables are NOT cash Your receivables are a promise to pay. You cannot grow your business with them, pay your employees with them or use them to buy new equipment. If you let your receivables sit on your books too long, the promise to pay becomes less likely to be realized, and may disappear forever. The money is not earned until it is in your bank account.
- Small businesses cannot get a tax benefit from writing off bad debt. You are throwing money away if you forego recovery of your accounts receivables thinking you can just “write off” the balances and obtain a tax credit. Check with your accountant or a tax attorney regarding this issue. At very least, you must make some attempt to recover at least some of the money owed to you.
- Debt collection is not too expensive. You can and should negotiate a competitive rate with the agency, but not all rates are created equal. Most collection agencies work on a contingency basis, which means you pay no money upfront, and the agency retains a percentage of what they collect for you.
- Waiting too long to pursue bad debt is not a good strategy, and can hurt your business. Delay can hurt you. You are losing the use of the money, and you are also betting on the customer still being around or being able to pay when you decide it is time to collect.
- Payment plans should never be based on a handshake. They should always be documented.
- Going to court and getting a judgment is not always the best strategy. Not all claims should be litigated. Part of effective small business debt collection is having a collection strategy that varies according to the nature of the debt.
- Credit bureau reporting is not the best way to collect money. There are risks associated with credit reporting that you should know.
- Bankruptcy does not always mean you cannot collect at least some of your money. Here is some good information on what to do if a customer declares bankruptcy.
- Bounced checks can be recovered. Laws vary by state, and you must follow the law, but you can not only recover the check amount, but also associated costs.
- Collection agencies do not always buy debt. In fact, many small business local collection agencies do not buy the debt, but rather work in an agency agreement with the original creditor. Most of the large debt portfolio buyers purchase debt from banks or other lending companies.