Collections are a fact of life when you run your own business. Sooner or later, something will happen that will put you in a position where you have to get a customer to cover an unpaid bill. Even if you don't extend credit to your clients, there may be a bounced check or other situation that requires you to go to lengths to get your payment. It isn't possible to eliminate the collections process, but you can make it easier.
1. Plan for collections from the start
Melissa Brumback handles collections for her firm and also provides help for clients collecting on unpaid accounts. Her experiences have led her to recommend making your first contact with a new customer with the collections process in mind. "Be careful on the front side in who you extend credit to," Brumback suggests. "Get a personal guarantee if possible. Make a copy of the person's driver's license. (This helps if you have to sue to collect). Check their credit."
Anything you can do to make the collections process easier (whether or not it turns out to be necessary) is useful. Brumback goes on to point out that having a written contract will help if you ever need to escalate the collections process. "Have a written contract if possible. Failing that, a signed purchase order agreement, with contract terms on the back, would be good. You can include language for interest (up to 18 percent per annum) and reasonable attorney fees and collection costs. If you don't have this in writing, you may not be able to get these items later."
2. Put a standard system in place
Even if you don't wind up in a position where the collections process is necessary, having a system is crucial. A system speeds up your ability to respond — you aren't standing around, trying to decide what to do next — as well as provides a way to make sure that you take care of every step needed in a worst case scenario, such as taking the matter to court. The first step to a good collections system is having a reliable bookkeeping system. If your invoices don't go out on a regular basis, a past due account may be more a matter of the client not realizing that there was an invoice than choosing to ignore it.
Your collections system should include a time line, according to Brumback: "When an account is X days late, send a polite but firm demand letter. When an account is Y days late, initiate a lawsuit or have your attorney send a demand letter, etc." Brumback also points out that it's important to consider your local requirements for actions such as filing a lien. "If you are in the position to file a mechanic's lien (contractor, subcontractor, etc), be aware of time deadlines for both filing a lien and perfecting that lien. These are state-dependent, so consult an attorney in your state."
3. Remember that your customers are valuable
In a collections situation, there's a tendency to see a client who hasn't paid as the bad guy. It's completely understandable, but an approach based on that viewpoint is almost certainly going to put a client off. After all, no one wants to feel like they've done wrong, no matter the actual circumstances. Finding an approach that takes the client into consideration is crucial.
Barry Maher may now be a motivational speaker and consultant, but he made his mark as a salesman and sales manager. Maher says, "For me, the key to dealing with customers who are behind on their payments is to treat them as valued customers. To avoid embarrassing them, we start out by 'just touching base' to see if the payment fell between the cracks or there was some oversight. Then we show understanding, allowing them to save as much face as possible and, at all costs, avoid getting their back up, so they become defensive and look for reasons why they shouldn't have had to pay in the first place."
4. Don't let the situation drag on
Collections can be particularly wearing because it can feel like you've been trying to get the same client to pay for months — and in particularly bad situations, that time line may not be far off. By the end of the process, you're often willing to accept less than you actually deserve, just to get the whole mess over and done with. Getting an account paid quickly is just as much a priority as getting it paid in full. Look for practical solutions: alternative payment arrangements can offer an opportunity to resolve the matter, albeit not as well as if the customer in question had just paid on time.
But with payment plans and similar arrangements, it's especially important to be sure that a client can't miss a payment and start the whole problem over again. Brumback suggests getting the whole situation in writing and even taking it a step beyond a simple contract. "If your customer acknowledges the debt, and is willing to sign a note or confession of judgment, you can offer payment terms. If the payment terms are not met, then you can file the note and judgment." Such a note lets you go straight to court if a payment arrangement falls through.
5. Know when to walk away
The hardest part of the collections process is recognizing when there simply isn't a way left to get a customer to pay an account in full. Whether you're dealing with a customer who has declared bankruptcy or simply disappeared, there is a point where it's simply a matter of giving up — rather than using your time to chase after an unpaid account, using that time to find new customers is just more practical.
You don't want to give up too easily, of course. But if you take a good, hard look at how likely your business is to receive payment and it seems to be close to impossible, it's time to consider settling for less or even walking away.
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