Unless your company is a bank, it's not good business for you to be a banker for your customers. It's best to get paid upfront. Unfortunately, this isn’t always possible. There may be industry practices or customer preferences that necessitate your billing for services performed or goods delivered. This puts you in the position of having to collect what you’re owed on these invoices. Here are five ways you can help ensure that you’ll be able to collect what’s due.
1. Use smart billing practices.
There are several ways to ensure that payment starts as soon as possible (perhaps even before your bill lands in accounts payable). Some strategies include:
Bill as you go. Say you’re a web designer who has a contract to create a site for a business. Be sure that the contract entitles you to collect in stages as portions of the job are completed. This will avoid having to wait for payment or even having the unpleasant possibility of not getting paid for the entire job.
Bill as quickly as possible. Send your invoice when goods have been shipped or services completed. Don’t wait until the end of the month.
Bill electronically. Rather than using a paper invoice sent via snail mail, bill electronically. E-mail invoices are received immediately and can't get lost in the post or under a pile of paperwork. Extra benefit: you save on postage!
Accept alternative payment methods. There are more than just cash, checks and credit cards these days. Consider using PayPal or another electronic payment method. QuickBooks Billing Solution is a way for customers to pay online and is available to its users who sign up for merchant services. Intuit’s Payment Network lets you put a Pay button on your Website or insert a custom paylink.
2. Set up collection policies.
Invoices aren’t fine wine and they don’t get better with age; the older they become the less likely you are to collect all or even some of what you’re owed. According to the Maryland Bar Association, your chance of full collection after 60 days is only 70 percent; after 90 days it drops to 45 percent and after 120 days, to just 20 percent. (These stats relate to collections of legal fees, but I venture to say they are fairly representative of most outstanding receivables.)
Decide what’s “late” for your purposes. Is it a week? 10 days? Whatever you decide, set your follow-up policies:
How will you follow up? By a second invoice? A phone call? Intuit’s MoneyDue is a new free app that you can use to send reminders from your iPhone or iPod Touch devices.
Who will do the follow up? Large corporations have staff devoted to collections on outstanding accounts receivable, but small companies must designate who is responsible for this activity. Is it the owner? An inside bookkeeper? Someone else?
How long will you continue to follow up before using other options? If you have a medical practice, you know that insurance companies typically don’t pay before 90 days. For other customers, you may want to try collections at 30 days, 60 days and 90 days before taking other actions.
3. Use factoring.
You may be sitting on a mound of receivables, but without the cash from them you may be in serious financial trouble because you can’t pay your bills. If so, consider selling your receivables to another firm (called a “factor”) at a discount. For example, instead of collecting $1,000, you’ll be paid $990 now by the factor. Whether and when the factor collects the full amount does not impact you.
If you decide to go this route, which you can do for select receivables (you don’t have to do so for all of your outstanding invoices), use a reputable factor. Use one that belongs to an association, which monitors its members such as the International Factoring Association or the Commercial Finance Association.
4. Follow the law.
Taxwise, if you are on the cash method of accounting, you can’t deduct an unpaid invoice for services you performed. It’s an economic loss because you put in the time and effort, but the tax law says you can’t write it off. However, if you sell goods, you can deduct unpaid receivables when you determine they are uncollectible.
In your zeal to collect what you’re owed, don’t step over the legal line and violate the Fair Debt Collection Practices Act, which applies to consumer debt (not to debt incurred by a business). Avoid things like using threats of harm or obscene or profane language, calling before 8 am or after 9 pm, and contacting the debtor’s employer, neighbors or anyone else.
5. Understand your other options.
You may be able to sue in small claims court. Each state has its own limits on the amount you can sue for, which may be less than what you’re owed. Check your small claims rules to learn the process for using this collection option.
If you’ve gone as far as you can in your personal efforts to collect, consider turning to an expert.
Attorneys can send a collection letter on your behalf, with the threat of legal action if payment is not made. Sometimes this is all that’s needed to prompt a slow payer to get moving. This option will cost you legal fees, but they may be modest compared to what you’re owed.
Collection agencies can collect on your behalf. The agency typically gets a percentage of what is collected (25 to 40 percent). This means that if you’re owed $1,000 and agree to pay 25 percent for collection by an agency, you’ll only net $375 if the agency collects half the debt.
Do you have trouble collecting invoices? What's the most dramatic step you have taken to secure payment?
Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business, and trusted professional advocate for small businesses and entrepreneurs. Follow her on Twitter @BarbaraWeltman.
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