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Top 5 Credit and Collections Mistakes and How to Fix Them!

Yesterday I read, “Small business owners wear many hats, and it is not a fashion statement”. One “hat” is the task of bad debt recovery. Nothing can sink a business faster than too many unpaid receivables, and it is important to track them and follow up to get them paid. However, the credit and collections process begins well before you even deliver your product or service, and there are often things overlooked that hurt a business down the road.

TOP_5_credit_mistakes
Here are the top 5 mistakes small business owners make in their credit and collections practices:
  • No contract – When you begin a business relationship with a solid contract that outlines the nature and scope or your business relationship, you are much more likely to succeed. Depending on your business, you may not be able to have a full contract, but at very least confirm your price and basic terms before you deliver your product. (For example, a busy tradesman intakes new customer name and address, and confirms the following in an email to client. “Our price is 125 per hour with a two hour minimum. Payment by check/credit/debit is expected at time of service. If you do not pay at time of service, we will bill you and payment is due in 30 days. Monthly interest of 1% (12% annual) will be applied to all balances over 30 days. If your account is referred for collections, you agree to be responsible for all costs of collection, including reasonable attorney fees)** Ask customer to email back their consent, then go do the work for them or ship them the product. 
  • No personal guarantee – A personal guarantee would apply if your customer is a business, particularly a new business and is when the principals guarantee the business debt in the event that the business folds. Try leasing a piece of equipment or opening a  new line of credit for your business without signing a personal guarantee. Chances are, you cannot, because leasing companies and banks are in the business of granting credit and they know from experience that a personal guarantee protects them. If a customer refuses to sign a personal guarantee, you can make a decision whether or not to go forward, but at least it is an informed decision. 
  • Scarce customer information and poor documentation  – When new customers contact you, how much information do you take from them? You would be surprised how many small business owners take only a first name and cell phone number and then grant thousands of dollars in credit. If this is you, stop it, now! Also, if you agree with customers that you will settle a debt for less than full balance or put together a payment plan, put it in writing and have customer sign. Be very clear of the terms of the setttement/plan, and make sure you advise customer that the deal is voided if they do not comply with the terms as outline. 
  • Collecting bad judgments – The small claims courts can be a great tool to recover bad debt if used effectively, but they do not work for any file. Small claims courts do not collect the money for you. You still have to collect the money on your own. Court judgments do give you the right to attach certain assets, but if there are no assets to attach, the small claims process is a waste of time. Learn the small claims process and carefully select the files you wish to litigate. A good collection agency or collection attorney can assist with this process. 
  • Waiting too long to pursue bad debt – If a customer goes 90 days overdue, and ignores your collection letters, you have a problem. If you wait too long, your debt may be out of statute and you will be unable to collect. We regularly see people letting debt for years before they decide to hire a collection agency. Set your limit and stick to it. If you think you are saving on collection agency fees by holding on to bad debt, think again, because you are risking getting nothing at all
Even with the best planning and execution, you may still have some non-paying customers. However, by avoiding these mistakes, you will certainly cut down on bad debt in your business and bring that all important cash back to work for you!
** Note: This language is included for demonstration only, and is not to be interpreted as legal advice. Please work with your attorney to construct contractual language that works for you.
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