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Make 'Em Pay: The Best Debt Collection Strategies (Part 1)

Legal Information for Entrepreneurs

Make 'Em Pay: The Best Debt Collection Strategies (Part 1)

Written by Celeste Heiter for Gaebler Ventures

One of the most challenging issues faced by entrepreneurs is debt collection. This two-part article will help you decide whether to extend credit to clients, and strategies for collecting delinquent debts.

In a perfect world, every entrepreneur's clientele would pay bills in full and on time.

But as any entrepreneur who has extended credit to clients probably knows, this is rarely the case. And of all the tasks and issues faced by entrepreneurs, debt collection ranks as one of the most challenging. Deadbeat customers and clients can jam up your cash flow and debt collection can rob you of valuable time that could be spent much more happily and productively. There are, however, steps you can take to minimize the likelihood of getting stuck with unpaid invoices and to successfully collect your due from delinquent debtors.

Should You Offer Credit?

The most important factor in debt collection should be considered long before a debt is established with a client. When you allow clients to accept goods or services on a promise to pay, you are in essence loaning them money. You wouldn't loan money to just anyone, would you? Of course not! Therefore it is of the utmost importance to decide whether you are in a position to extend credit to potential clients, and if so, to whom.

When considering whether to offer credit to your clients, first ask yourself if the cash flow you need to keep your business afloat can accommodate debts in your accounts payable. If not, then don't extend credit. Ask for a deposit up front (be sure to specify whether the deposit is refundable or not), and require full payment upon transfer of goods or completion of services. No exceptions. Of course this may mean that you will lose those potential clients who won't do business without the option of credit, but at least you won't be putting yourself at risk.

If you do decide to offer credit to your clientele, make sure that you do a credit and background check before any transaction occurs. Ask for references, check with the Better Business Bureau, and run a credit check with one or more of the credit reporting agencies. This is especially important if the amount of credit will be substantial. Imagine what would happen if you delivered those goods or services as promised, and then didn't get paid for a year or more (with a lengthy and costly court battle), got paid only a fraction of the total through a collection agency, or didn't get paid at all. Can you afford to take that risk?

Establishing a Paper Trail

Once you've decided to extend credit to your clients, the first step should be establishing a clearly-defined and well-documented paper trail. Do not enter into a transaction of any kind without first issuing a receipt for goods or drafting an air-tight contract that defines the terms of that transaction.

For the sale of goods, your receipt should include your business name, the client's name, the specific goods involved, terms of payment, any potential penalties for late payment, and any refund/exchange policies, warranties, or liabilities. For the performance of services, a detailed contract should be drafted. It should specify all services to be performed, the duration or deadline for services, terms of payment, potential penalties for late payment, remedial policies for errors on your part, and all warranties or liabilities. All receipts and contracts should be signed and dated by both you and the client, and identical copies should be provided for both parties. Each and every transaction you enter into should follow these guidelines. No exceptions.

Once the transaction is complete and the goods or services have been delivered as promised, the last piece of the paper trail is the invoice. Like the receipt or contract, your invoice should include your business name, your client's name, all goods delivered or services performed, all terms of payment, penalties for late payment, and any warranties or liabilities. The invoice should be issued in a timely fashion, and ideally should include a self-addressed envelope for payment.

But what if your client refuses to pay? The best process for collecting outstanding debts is outlined in Part 2.

Celeste Heiter is an entrepreneur and professional writer. She has owned several businesses, is a graphic designer and an expert on Japan and its culture. Today Celeste devotes her time to writing about a variety of business topics.