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The Process of Debt Collection for Small Businesses Explained in 8 Simple Steps

Published: Nov 11, 2021

For a small business, every penny you’re owed matters. A healthy flow of income and business collections is what keeps you up and running. 

However, if the payment you’re owed doesn’t reach you, you need a way to collect it. But, you don’t want this ‘way’ to be a long or a wrong one. 

We understand that the debt collection process for small businesses can be complex. But, following proper procedures and laws can make the whole process smooth. Billion-dollar companies also start somewhere, and one of the primary reasons for their success is streamlined processes. 

There are several steps you can take to get there. The first step to a successful collection process for small businesses is to understand the process and follow it. 

So how to collect debt from a customer?

Let’s get to it.

What are the steps in the collection process?

The collection process for small businesses starts at an internal level. As the debtor delays your payments or makes it hard to continue the process, more and more parties get involved. 

For instance, you start by dealing with the collection by yourself. Your initial reminders, follow-ups, or even negotiations will have a positive and helpful note. If it gets difficult to deal with the debtor by yourself, you take the help of a professional. At this stage, you’ll need to get direct while staying professional. Eventually, if there comes a point where the customer/client is not cooperating, you may need to take legal action.

Nonetheless, the collection process for small businesses needs a set of standardized practices to resolve the payment issues properly for the whole process. We have illustrated the process flow along with a few best practices for each step. Note that depending on your relationship with the customer/client, the payment size, etc., some steps may repeat, be eliminated, or swapped.  

Now, let’s see what the collection process for small businesses looks like.

1. Sending the invoice

First, you send the invoice as a part of the regular payment collection process. The invoice should clearly state the amount you’re owed along with the terms and conditions. 

Best practices:

  1. Include all the other relevant information like a unique invoice number, date, contact information, etc.
  2. Use an invoicing software such as FreshBooks, which offers automated payment reminders and follow-ups.
  3. Provide multiple payment methods along with clickable links wherever applicable.

2. Contacting the debtor by yourself

After sending the invoice, if you don’t hear from your customer/client, send a reminder via email or a phone call, depending on your bond with them. Keep the tone polite as you don’t want to come off too strong and affect your relationship. At this point, you’re unsure of the reason behind not hearing from them, so focus on finding that out. 

For instance, it’s possible that 

  • The invoice didn’t reach your customer/client, or 
  • It skipped their mind to process your payment, or
  • They need some time to make the payment.

In such circumstances, one friendly reminder can save you from complications. 

For example, if you’re sending an email, it could look something like this:

Dear {first name},

We mailed your invoice {invoice number} on {date}. Your payment is overdue, and we assume the invoice was overlooked or it did not reach you. Attached is another copy of the invoice. We request you to clear the payment at the earliest. 

Do let us know if you need any assistance 🙂

Here’s a guide on building a persuasive debt collection call script along with templates. Leaving voicemails is another medium to send these payment reminders to your customer/client. 

Best practices: 

  1. Assign a trained individual to carry the tasks related to debt collection. 
  2. Documentation plays a huge role in the collection process for small businesses. Keep a record of your communication with the customer/client along with the details like the date and time, the person contacted, the reason for the delayed payment, the resolution you arrived at, etc. This will come in handy if you need to take legal action in the future. Our TCPA compliant dialer helps you keep track of all these details. Our dialer has features that help you take notes on the platform while on the call and add dispositions and tags for future references.  
  3. Collect relevant contact details from your customers right at the time of signing the agreement. Check in with your customers regularly to keep these contacts up-to-date. Getting in touch with customers frequently not only helps with the collection process for small businesses but also helps to build a good relationship with them.

3. Negotiate

Sometimes, one call isn’t enough. When it comes to the debt collection process for small businesses, persistence is the key.  

After the first contact, follow up with your customer/client with a solution to their problem with paying you. Make sure this solution is appealing to them while also keeping your finances in mind. For instance, if your customer/client is in financial difficulty, try offering them a discount or discussing a new payment plan instead of demanding a complete payment. 

Even at this stage, remember not to harass your customer/client. Keep a polite tone and respect your relationship with them. 

For example, if you have a very formal relationship with your customer/client, your call could sound something like this: 

Hello, {first_name}. I am a little concerned because your payment was due on {due_date}, and we sent {number_of_reminders} reminders about the same. May I know the reason for this? I can see if we can be of help.

Best practices: 

  1. Focus on getting confirmation on when they can clear your invoice(s).  
  2. Be prepared to collect details on tracking the transaction if they say they’ve already initiated your payment.
  3. Although you’re being polite, don’t apologize for asking for the money you’re owed.
  4. Give a sufficient gap between your first contact and this follow-up call. Ideally, after 7-10 days.

We have a guide on automating your debt collection calls. Give it a read to know how you can adapt it into the process.

4. Issuing dunning letters

After sending a polite reminder too, if you haven’t received the payment yet, it’s time to get a little firm. Issue a dunning letter, which is simply a demand letter and acts as an official written reminder of the due payment.  

The dunning letter sets the base of an official notice in the collection process for small businesses. This should also point the customer/client to the invoice(s) and include the highlights of your past conversations. For example, your letter can look something like this:

{Address of the debtor}

Subject line: Invoice #{invoice number} due on {date}

Dear {first name},

This letter is a reminder of the pending payment from your end. We had concluded that you would clear the payment by {date}.

Please make the payment immediately. If you fail to do so, we will be forced to discontinue our services and take appropriate action as a part of our agreement.

Thank you,

Best practices:

  1. Keep a copy of the letter.
  2. Mention the consequences of not abiding by the contract and include a final date to make the payment before taking the next step.
  3. Include the invoice(s) and the references of previous reminders.
  4. Take an attorney’s or agency’s help to write the letter in exchange for a small fee. You increase the chances of getting the payment when you include attorney information in your letter.

5. Discontinuing the services

Send your customers/clients an official letter and email mentioning the reason for discontinuing the services. Also, say what they need to do to continue to avail the services.

Best practice

  1. Make a mention of this situation in your terms and conditions. For instance, say if the payment is ‘x’ days/months past the due date, you hold the right to discontinue the services. 

From the next step, the expenses involved in the collection process for small businesses are quite large. So, at every step, think if the amount you’re owed is worth the time and the expenses. 

6. Going to small claims court

Although time-consuming and expensive, this step is an effective way of collecting the amount you’re owed. Having said that, with a small claims court, you can avoid the court and attorney fees. You need to file a claim in your state’s small claims court to get the collection started.  

However, the defendant can refuse to comply with a small claims court’s judgment. If that happens, further enforcement will take more time and money. Also, once you file a case in a small claims court, it cannot be appealed. You need to make sure the debtor is served and complete all the required paperwork. 

Best practice

  1. Try hiring a professional mediator or an attorney to help you with the legalities.

7. Hiring a debt collection agency

If none of the previous steps are working, you need the help of a stronger entity: A debt collection agency service. The collection process for small businesses typically involves an agency once they are 90 days into the process. However, this depends on your risk tolerance for bad debt. 

This step is one of the last options because debt collection agencies for small businesses take a portion of the collected debt as their service fee. The average fee ranges from 25-50% of the total amount collected, depending on the age and size of the debt.  

When you work with an agency, you can send a ‘pre-collect notice’ stating the date by which they have to respond. Make sure you choose a good agency and discuss the situation with them beforehand to determine if they are the ideal choice.  

Best practices:

  1. Make sure the agency you choose has the license to provide the services.
  2. Make sure the agency follows the state and federal laws associated with debt collection.
  3. Check for any grievances filed against the agency.

8. Filing a lawsuit

Filing a lawsuit, again, is time-consuming and expensive but effective in the collection process for small businesses. You need to hire an attorney to fight your case. Be on the lookout for bankruptcy filings, as once your customer is stated bankrupt, you cannot claim your payment unless the court decides otherwise.

Best practice:

  1. Check with your attorney beforehand if you have a good case to win against your customer.

Now, here are some tips to keep in mind for the collection process for small businesses:

  • Stay calm, so your customers/clients cooperate throughout the process.
  • Stay up-to-date with the laws and trends in the debt collection industry.
  • Document every little detail, like the date you reached out to your customer/client, notes of the phone call, etc.
  • Keep an in-house debt collection team ready.
  • Keep an up-to-date record of the payment history of your customers and clients.
  • Tailor your process based on the relationship you have with your customer/client. 

Get started

The debt collection process for small businesses is quite challenging and demands a lot of time and patience. The goal should be to walk on that thin line while making sure neither are you being pushed over nor are you harassing your customers. 

FDCPA(Federal Debt Collection Practices Act) defines a few laws that even debt collectors need to abide by regardless of the amount you’re owed. 

Here are some examples of such laws:

  • The calls can only be between 8 am and 9 pm. 
  • You need to use the right business name as it’s on paper.
  • You can’t involve the debtor’s colleagues, family, friends, etc., in the collection process.
  • You can’t threaten or mislead the debtor.

Check the state and local laws too, and stay within the regulations. There are some guidelines by TCPA too, which you’ll need to remain compliant with throughout the collection process. The bottom line is, know the rules and play by them. 

Also, the procedures need to be flexible to adapt to the changing times and uncertain environments. 

Now, how do you prevent and protect yourself from bad debts in the first place? We have a complete guide to help you with that too. 

Share these links with your team so they can streamline the collection process for your business. 

Featured image: Photo by Dylan Gillis on Unsplash

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