Debt collection for small business owners – The legal implications

Businesses keep a certain amount of funding for bad debts or contingencies. However, too much of everything hurts, especially bad debts. Bad debt collection is a problem for small businesses that need majority of their time focusing on the core functions instead of running after the debtors, while debtors prolong the time with brush off emails and calls going straight to voice mails.  Debt collection becomes a difficult task for small businesses that have limited time and resources for growth and stability.

There are customers or clients that are not habitually debt defaulters but fail to comply with the agreed dates for genuine reasons. While some customers/clients either go by not paying off at all or paying in small chunks causing trouble (with delayed payments)- in both the cases, your business needs to pool in efforts for debt collection which is both time consuming and frustrating.

How to Avoid Bad Debts?

Bad debts could not be avoided by 100%; however the chances of it could be reduced with some of the tactics by business, such as:

  • Keep the due date lists organized and marked on calendar. Also, list the due dates on all the bills for a reminder for both parties.
  • Abide by strict payment policies that could include late payment fee and surcharges (include this in your policy so the debtors may know).
  • Ask for half of the amount in advance so if the debt is never paid back, it’s only half of the total amount.
  • Keep constant contact with the client, via phone, mails or face to face meetings.

The Don’ts of Debt Collection

No wonder debt collection becomes critical at some point and is very much time consuming and frustrating, there are certain limitations to it which you need to take into consideration as a business.

  1. Don’t collect the debts in the name of a false entity or person.
  2. Don’t change the figures (up or down) than what amount is actually due.
  3. Don’t charge the debtors for malpractice if they haven’t committed one (just to fetch your money from their pocket).
  4. Don’t threaten by using authority you don’t possess (or by claiming about having taken legal actions when you haven’t).

Debt Collection Tips

While what seems is too little of options left after keeping in mind the don’ts of debt collection, there are some key points to keep in consideration which can ensure debt collection without creating much rift in the business relations with those clients.

  1. Devise a strategy for debt collection and alter it according to the type of clients and their payment habits. Strict rules for the ones which pay on time always may jeopardize the work relations with them and being too lenient with the habitual defaulters would put you on the grounds of loss – So plan accordingly.
  2. Collection agencies could be hired to collect debts so the business needs not worry about wasting time on activities other than its core functions. These agencies charge hefty amounts as fees but ensure payments to a great extent.
  3. If a debtor asks for it or you think he/she would agree to it, make an offer for settlement on less than the due amount so you might not lose the entire amount rather a small portion would be labelled as bad debt.
  4. Make frequent phone calls but don’t nag the debtors at wee hours or during peak holiday season. Also keep the calls short and to the point while not crossing the boundaries of mannerism and professionalism.
  5. Write demand letters and send them in addition to the phone calls so to induce action from debtors’ end.

 

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