Small business owners should always try to collect debt in-house before sending the file off to a collection agency. However, there needs to be a plan for debt collection success: specific actions to take, and a time limit as to how long you will wait on delinquent customers.

How you decide if a customer gets credit from you? You may not have time to do an in-depth investigation on each customer’s creditworthiness, but you must gather at least some basic information. Take the time to get trade and bank references. Verify and document them.

The best documentation is a customer contract that outlines the terms and conditions of your business relationship as well as your specific payment terms and consequences for non-payment. Do you want to charge interest or a late fee? You need a written agreement. Do you want to recover part or all of your costs of collection? It needs to be in your contract. Don’t have time for a long, complicated contract? Send a simple email outlining your payment terms to customer and ask them to reply with their agreement. Voila – a simple contract!

When you have identified your delinquent customers, a great collection letter is always a good start, along with a few reminder phone calls. We recommend two letters and a final notice, with calls from support staff and a final call from management. If you do all that, and you still have no response, do not wait any longer. Hire a collection agency or take legal action.

Some customers may not be able to pay their entire bill at once, but would be willing to set up payment arrangements. It is very important to document all arrangements: how much will be paid, how it will be paid, and when payments are due. Also, be certain to state that the payment arrangement is good only as long as payments are made as agreed. It is our experience that many people will make the first couple of payments, then default, so it is important that they know they will be held accountable to the terms of the arrangement.

It may also be appropriate to settle the balance owed in order to prevent sending a customer to collections. Once again, documentation is crucial. If you are going to offer a settlement, you must make it a limited time offer and must inform the customer that if they do not pay the settled amount in the time agreed time period, that the settlement will be void and the full balance due and owing.

If you take a few minutes to make sure that you communicate all the details of an arrangement to your customers, you are more likely to be successful.