Finding ways to ensure prompt payment is an age-old issue for businesses. From the earliest records, there has always been the tax collector and the debtor, so know that if you have clients in arrears, you are most assuredly not alone. By outlining the steps you can take to bring past due accounts current and even keep your clients during the collection process, you'll be better prepared to handle the situation should it arise.
A word of warning before you make any attempts to collect on a debt, make sure you understand and operate within the boundaries of the law. This includes both federal lawincluding the Fair Debt Collection Practices Act and related legislationas well as any state and local restrictions. These laws can be reviewed by going to the Federal Trade Commissions web site at www.FTC.gov.
The key is to try to maximize collections for your business operation without exposing it to liability for abusive debt-collection practices. Here are several ways you might stay out of trouble while you pursue what is rightfully yours.
1) Stay on top of your accounts payable. If a client or customer thinks you have forgotten about a bill, it may become a low priority. If the payment term is the standard 30 days, don't let nonpayment go unaddressed for more than another week or two.
2) Use the Personal Approach. Keeping customers through payment issues is important too. Often your clients aren't intentionally delinquent, so a gentle reminder may do the trick. Make a straightforward phone call reminding the client that the account is overdue. Talk directly with the Accounts Payable person or department if possible and if that doesn't provide resolution, talk with your original business contract that purchased the product or service. Before you end the conversation, remember to ask when you can expect to receive payment. If you get voicemail, leave a pleasant, concise message with the invoice number and request a return call by a specific date.
3) Follow up is key. If personal communication does not produce payment, follow up with a registered or certified letter detailing (1) the amount owed, (2) the original invoice date and (3) the date on which the goods were delivered or the services were provided. Make sure you have proof that you performed your part of the bargain.
Take a look at the wording for your follow up letters and rework them to have a stronger request. State any additional measures you will take, including litigation (if you will indeed follow through with this option), if payment is not received. Never use postcards or mark the outside of the envelope that the enclosed is an attempt to collect a debt or demand payment as they could lead to civil and/or criminal liability under federal law.
4) Be professional. Never resort to heated conversation, foul language or name calling in your collection attempts. Be truthful, business-like, and don't further agitate the situation should it become confrontational. If conflict does arise, outline the next steps and politely leave the conversation.
5) Try to keep the matter private and stay out of court if you can. You might try to arbitrate the dispute, especially if the debtor claims there is a problem with the goods or services. Alternative dispute resolution is faster and less expensive than court and often produces agreeable results.
Try to look on the bright side. As a last resort, you may be entitled to a business debt tax deduction if you maintain your books on an accrual basis of accounting. A business deducts its bad debts from gross income when figuring its taxable income. Talk with your business or tax advisor before taking such a deduction.
If you have provided goods or services and believe you have delivered on your promise, don't back down. If you need assistance to better manage your small business accounting, contact your accountant.
Steven A. Feinberg, CPA - www.AppletreeBusiness.com