collection is critical to any small business. With
limited capital, collecting payments for every business
transaction becomes crucial to keepting the business afloat.
At some point you may run into a situation where you have to
collect outstanding debts (also known as Accounts
Follow these steps
to engage in debt collection.
Step 1: Develop Written Policy:
If you're going to offer debt to
anyone you should develop a written policy that stiuplate
the circumstances under which credit may be granted and the
procuedure that must be followed. Create a credit
application form. Your policy must stipulate these key
1. Payment terms:
This is how long will the customer have to pay. This could
be on a Net 15, Net 30, Net 60 or Net 90. In other words
they have to pay within 15, 30, 60 or 90 days.
What interest will be added to the outstanding debt if it is
not paid on time. Interest payment is covered in the
Truth-in-Lending Act. State laws limit the amount of
interest you can charge.
3. Collection Procedures:
Stiuplate the procedures that will be followed in order to
collect the debt. It should state how often the individual
will be contact, when they will be contacted, the methods
that will be used to contact them (email, phone, letters,
4. Contact Information:
The application form must collect all relevant contact
information to include, name, address, phone number, email
5. Discontinuation of
Service: It should stipulate when all services to
the debtor will be discontinued. It should also stiupulate
when the debtor will be notified of such discontinuation of
6. Record of
Communication: It should stiuplate how all
communications with the debtor will be recorded and
maintained in the debtor's file.
7. Debt Collection
Notification: Stipulate when the debtor will be
notified that collection will be turned over to a collection
Step 2: Attempt to collect the debt yourself:
attempting to collect outstanding debts abide by the
Designate someone to perform this task. This person will be
the only individual that the debtor will correspond with.
2. Make sure that all
communications procedures are followed.
3. You can offer discounts in
order to reduce the outstanding amount and give an incentive
to the individual to pay off the debt.
4. If every attempt to collect
the debt fail you have two options. You can take legal
action (such as mediation, arbitration, collaboration or
small claims court). If you wish to avoid the legal route
you can refer the case to a collections agency.
Step 3: Legal
You have the option to pursue
legal action aganist the individual to collect outstanding
debts. These actions could result in mediation, arbitration,
collaboration or small claims court. This course of action
incurrs legal fees that could place your business at a
financial disadvantage if the legal fees outweight the
amount that is outstanding.
Step 4: Collections
If you pursue the
collection agency route you should be aware that collection
agencies can charge up to 50 percent of what they collect
from the outstanding amount as a fee to collect the debt.
If you chose this route you should ensure that the
collection agency do the following:
Collection agencies must be licensed and bonded.
2. They should operate under the
Fair Debt Collection Practices Act.
3. Check with the
federal Consumer Protection Agency or
state Consumer Protection Agency office
to find out if there were any greviances filed against them.
Report to Credit Bureau:
Reporting to a credit bureau could result in adverse data in
a debtor's credit report. This gives your business leverage
in getting a favorable response from your debtors. You have
the option to report the bad debt to credit agencies. As a
small business you can do this in one of two ways.
1. You can hire a credit reporting service company (also
known as 3rd party processors) to do it for you.
Lyon Credit Services
The Service Bureau
2. You can join a credit
reporting bureau and report directly to them. In order to
use this option you must have a certain number of customer
payment histories and a specified minimum number of open
accounts with debtors.