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Grow Your Business Finances

The Check's in the Mail: How to Ensure Your Small Business Gets Paid


Doing the work is the easy part for many small businesses.  Too often, getting paid is the hard part. Sound familiar?

For all too many small businesses, slow or nonpaying customers are a fact of life. Though you'll never be able to entirely eliminate slow-pays and no-pays from your customer roster, there are steps you can take to keep your accounts receivable under control and your balance sheet in the black, according to collections experts.

It all begins with awareness, Michelle Dunn, an internationally known author and expert on collections and credit, told BusinessNewsDaily: Awareness of the problem, awareness of the danger signs and awareness of your blinders in this area.

Guide to Getting Paid

Dunn's newest book, "The Guide to Getting Paid: Weed Out Bad Paying Customers, collect on Past Due Balances, And Avoid Bad Debt " (John Wiley & Sons), was published this month.

"Debt collection is always a problem for small-business owners," she said. "Most small-business owners are not educated or knowledgeable about debt collection. They went into business because they were good at something, and that something wasn't debt collection. Most don't realize it's a preventable problem."

The best way to avoid collection problems is to take pre-emptive action, Dunn said. And that starts with having a credit plan — a roadmap for how you want to do business with your customers that outlines how and when you want to be paid and the steps you'll take if you aren't.  What will you do when a payment from a customer is past due or a check is returned for insufficient funds?

Have a Plan

"When you start a business, you have a business plan," she said. "You should also have a credit plan. You should know what you're going to do before you have to do it. Your most important asset is cash."

Having a credit plan may also make it easier to obtain bank financing to start or expand your business, Dunn said, because it shows the lender the processes you have set up to assure that you are able to pay them back.

Before you make a sales or get a customer, Dunn said, you need to develop a credit application that provides information that helps you rate a customer's creditworthiness and outlines your terms of business. This document establishes the rules of the road that you expect your customer to follow.

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Document What's Due

"The most important document is a signed credit application," she said. "If you have a payment problem, it will help you collect your money."
No amount of advance planning or due diligence will make your small business completely immune to the problem of poor payment or nonpayment by customers. Good creditors can turn bad, Dunn said, particularly during economic downturns like the recent recession.

One sure-fire danger sign that you have a debt collection problem is that you're making lots of sales but are not taking in enough money to pay your own bills. You need to keep an eye on how people are paying, Dunn said.

Cowboy Up

When payment problems do pop up on your business radar, inaction is not an option, Dunn said. It's time to cowboy up.

"You'd be surprised at how many people don't do anything," she said.   "Many small-business owners have told me they’re afraid to alienate customers by asking for money. It's time to make a decision: Am I in this to make money or to make friends?"

The most effective way to collect money, Dunn said, is to make a personal visit. Arrange to run into them.

"Debtors like to avoid confrontation," she said.

Offer a Solution

The second option is to call them on the phone.

"And keep on calling them," Dunn said. "But call them with a plan in mind. Offer them a solution. If you help them to be able to pay you, you'll keep the customer's good will. The reason that most people don't return calls about a debt they owe is that they don't know what to say."

Personal visits or making phone calls to a collect a debt is not everybody's cup of tea, Dunn admitted. Some business owners prefer to write or email instead. Letters do work, she said, but they're just not as effective.

Tricks of the Trade

If you do decide to write, Dunn outlined some tricks of the trade from her new book. You need to remember who your audience is, she said. Chances are good it's not a high-level executive.

Make it short, Dunn said, but state the facts and offer a course of action to resolve the issue. And use nontraditional envelopes of different colors and size and handwrite the address rather than use a printed label. It will help you make sure the letter gets opened.

"You don't want it to look like a bill," she said.

If you can include a link to a secure website where the customer can arrange payment, you'll see your collections results improve by 65 percent, Dunn said.

Sometimes, though, neither subtle persuasion nor moral suasion is fruitful and push comes to shove: Your customer has taken a one-way trip from debtor to dead beat. You don't have to invoke St. Judge, just yet, Dunn suggested. You can take your customer to court or turn the debt over to a collection agency.

When Push Comes to Shove: Court

If you decide to go to court, Dunn said, you — or your attorney — has to do all the work.  It can take a long time and the outcome is not guaranteed.

"Even if you have a judgment, it doesn't mean you're going to get paid," Dunn said.

But she does recommend it for debts of more than $1,000. Otherwise, she said, consider sending  the debt to a collection agency.

When Push Comes to Shove: Collections

"If you go with a collection agency, you don't have to do anything," she said.

By outsourcing the debt collection, Dunn suggested, you can also free up your energy and focus on more positive things such as growing your business or getting new customers.

A collection agency, she said, normally charges a commission of between 20 and 75 percent of the amount they are able to collect. The fee depends on the age and amount of the debt. This is one race that does go to the swift.

"If you wait too long — over a year — it's going to difficult for the agency to collect," Dunn said. "Look for an agency that specializes in your kind of debt."

The Prevent Defense

The best way to handle debt problems for your small business is to head them off at the pass.

"At least once a year, you need to fire some customers," Dunn said. "Print out your accounts receivable, see who is habitually past due or who gives you a hard time. These accounts are not profitable. Get rid of them."

Reach BusinessNewsDaily senior writer Ned Smith at nsmith@techmedianetwork.com. Follow him on Twitter @nedbsmith.

Ned Smith

Ned was senior writer at Sweeney Vesty, an international consulting firm, and was Vice President of communications for iQuest Analytics. Before that, he has been a web editor and managed the Internet and intranet sites for Citizens Communications. He began his journalism career as a police reporter with the Roanoke (Va.) Times, and was managing editor of American Way magazine and senior editor of Us. He was a Captain in the U.S. Air Force and has a masters in journalism from the University of Arizona.