Financial management

Debt collection strategies: before it gets nasty!

- October 7, 2010 3 MIN READ

For small business owners, debt collection can be an evil necessity; it’s something many of us would really rather not do, but must if we want our businesses to survive. Here are some helpful debt collection strategies.

If debt collection is an issue that concerns you, rest assured you’re not alone. In Flying Solo’s Understanding Micro Business survey, 30% of soloists highlighted getting paid as one of the key challenges facing their businesses.

Getting paid for your work upfront is the ideal solution to this age-old problem, but is not always possible.

I’ve successfully adopted the following debt collection strategies in my business, and I hope they’re also useful for yours.

Be clear about your pricing

Ensure every client understands the price of your product or service and what is and is not included in the quote. Don’t assume they’ve read your promotional material and know how you operate.

In service industries, it’s prudent to ask all clients to sign an agreement outlining pricing, inclusions, exclusions, privacy, limitations of liability, your cancellation policy and any other relevant issues. That way you’ll both know where you stand in the business relationship. Make sure you invite and welcome questions about your agreement, because it’s in your best interest to clarify any issues as early in the client relationship as possible.

Your agreement document may evolve as new issues present themselves. For example, it only occurred to me to include a cancellation policy in mine after a client pulled out of an appointment with me at the last minute.

Accurate and timely invoicing

Ensure your invoices do what they need to, making it clear to your client how much they owe you, and how and when they need to pay.

Send your invoices out as quickly as possible too. The sooner your client receives it, the sooner it will fall due for payment, and the healthier your cash flow will be.

Want more articles like this? Check out the financial management section.

Terms of payment

Think carefully about your payment terms, and don’t assume that you’re stuck with a situation that doesn’t work for you.

In my own business I initially offered terms of 30 days as I felt it was the industry norm. Unfortunately, it meant I couldn’t start chasing up payments for 30 days and many payments would be received 45 days after the invoice was issued, which was far from ideal for my business cash flow.

Over time, I reduced my terms to 14 days, then 7 days, and now I ask for payment on the day of service. Today, most of my clients automatically pay me on the day I work for them. My business cash flow is happy, and I’ve gained back the time I used to spend chasing payments.

Capacity to pay

If a client hasn’t paid your invoice, politely inform them that until the unpaid account is settled you won’t be able do any further work for them.

Only work for clients who have the capacity to pay you. Any indication of cash flow problems should ring alarm bells, and is one of several signs you should say no to clients.

Chasing up unpaid accounts

Firstly, contact your client’s accounts payable department to simply confirm that they have your invoice. This can be done by email, phone or SMS, and is a friendly and professional touch to make sure the invoice has been received and isn’t lost.

Next, check whether the invoice has been approved for payment.

Keep these conversations friendly and professional; chat about the weather, establish the name of the accounts payable clerk, and make a connection with them.

This can be done before the invoice is due, and will highlight any discrepancies that need to be dealt with. If they feel friendly towards you, it’s likely the accounts payable department will actively deal with your invoice or at least advise you when you’ll be able to expect payment.

Don’t give clients a reason to delay paying your invoices. If you’ve adopted these business savvy guidelines for collecting debt, in most instances payment will be received accordingly. Of course some may still slip through the cracks, in which case further options will need to be explored.

Aside from sending in the heavies, what successful debt collection strategies have you implemented in your business?

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  • Andrew Caska

    Caska IP Patent Attorneys

    'Flying Solo opened up so many doors for us - I honestly don't know where I'd be without it"