Being an entrepreneur is quintessentially American. Study after study shows the importance of new ideas and new entry into the US economy. Entrepreneurs take on both the risks and rewards of going it alone.
One of the biggest risks of having your own business is the risk that customers will not pay you for your product and service. Many an entrepreneur had stellar sales but yet has drowned in a sea of bad debt. We all want to believe that everyone will do the right thing, and most people start off a business relationship with the best intentions, but things happen, and every entrepreneur must put safeguards in place to protect their business.
1. The first vital step is to construct a simple but comprehensive customer contract. Some business owners tell me they prefer to do business with a handshake only, and that they find customer contracts too onerous. However, what better way to start a new business relationship than to have a contract that clearly communicates all important terms and conditions of the relationship?
Among other things, a customer contract should outline the scope of the work, its cost, the time line for payment. The contract must also address the consequences of late payments, or non-payment.
2. Secondly, it is a wise move to collect as much information on new customers as possible. If you are working with a business, especially a start up, get as much information as you can on the principals. Consider requiring a personal guarantee, which means that the principals will guarantee payments personaly if their business fails.
3. Bill promptly and regularly. Make sure your bills are clear and detailed so that people will easily understand them.
4. Stay on top of your overdue accounts. Have a strategy to contact customers who owe you money. Draft a collection letter that you can easily personalize and send out late-payers.
5. For any accounts over 90 days past due, consider hiring a local collection agency to help you collect money owed to you. Bad debt collection need not be an adversarial process – find an professional agency that will understand your business and collection goals and partner with them to get paid.
Would you like more tips to reduce bad debt in your business? Download our free “10 Tips to Reduce Bad Debt in your Business”