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Collecting business debt is a process, and like most things, dealing with it starts progressively and escalates as time passes. Remember that taking action is the way to get results. 

There are four main types of customers you’ll encounter when dealing with business collections:

  • Type 1 – “The Cheapskate”: A sleazy customer that’ll do anything to avoid paying.
  • Type 2 – “Captain Stalling”: Those that deliberately delay payment, but don’t want trouble.
  • Type 3 – “Struggling Sam”: Customers experiencing financial hardship, making payment difficult.
  • Type 4 – “Forgetful Fred”: People that are disorganized and forgot to pay.

This guide covers 25 proven strategies how to collect business debt. We’ll begin with ways to create a foundation for dealing with the most common situations (types 2, 3, and 4).

And if you’re here looking for ways to deal with a Cheapskate, we also have 11 strategies for dealing with seriously difficult or fraudulent customers.

How to Collect Business Debt

1. Develop a Payment Policy

Payment policies are important because they set expectations and provide a framework for customers to make timely payments. They also create a clear understanding of the consequences for non-payment, which can help to deter customers from not paying their bills. 

When properly implemented with a billing system, they provide a way for businesses to track payments and ensure that customers are held accountable.

Payment policies can also help to streamline collections by providing procedures for handling delinquent accounts.

Common Payment Policy Terms

  • Payment is due upon receipt of the invoice.
  • Any disputes must be reported within 30 days of the invoice date.
  • Late payments will incur a late fee.
  • If a payment is returned or declined, additional fees may be charged.
  • A finance charge may be applied to past due accounts.

2. Payment Terms in Writing

Having payment terms in writing is important for preventing bad debt because it helps to create a clear record of the agreement between you and your customer.

A clear, legally binding agreement also serves as evidence that can help prove the terms of the agreement in the event the debtor fails to make their payments. 

Written payment terms should also provide a clear timeline for when payment is due and any applicable late fees or other penalties for failure to pay. This helps to protect you from misunderstanding or miscommunication, and makes it easier to enforce the terms of the agreement, if necessary.

3. Due Date on All Invoices

It should go without saying, but without a due date, it’s impossible to track when payment is expected (and know when to take action if payment isn’t received). Avoid bad debt by ensuring that customers are aware of when payment is due.

4. Automatic or Recurring Payments

Automatic or recurring payments can help reduce unpaid invoices by ensuring that payments are made on time and that customers don’t forget to pay. This reduces the need for manual invoicing and collections, saving time and money.

Additionally, automatic payments are more secure than manual payments and reduce the risk of fraud. Recurring payments help build a predictable cash flow, allowing you to better plan for future expenses and investments.

5. Accept Credit Cards

Accepting credit cards can help reduce unpaid invoices and business debt by making it easier for customers to pay their bills. When customers are able to pay quickly and easily with a credit card, they are more likely to pay their invoices on time. Additionally, credit card companies provide protection against fraudulent purchases and chargebacks, helping to minimize losses.

6. Require a Deposit or Payment Upfront

When you ask customers for payment upfront, it significantly reduces the risk that your customer will back out. It can also help with cash flow, as you won’t be waiting for payments to come in after service has been provided.

When a customer makes a deposit, they are essentially committing to the purchase. This commitment reduces the risk of the customer not paying the full amount or not paying at all. Deposits are especially helpful for businesses that provide services with significant upfront costs.

7. Make Payment Options Clear

Having clear payment options is one of the best ways to deal with customers like Captain Stalling or Forgetful Fred. Having a difficult payment system makes it more likely that your clients will put off, and ultimately forget, paying you. A clear, easy to navigate system minimizes this risk. 

If possible, include a link to your payment processor on your invoice to make it easier for customers to pay. Also, offering customers a variety of payment options such as credit cards, PayPal, direct debit, and bank transfers can help.

8. Send Reminders

It’s possible, even likely, that a customer simply forgot to pay. Invoices get lost, emails get overlooked, and sometimes life gets busy.

Send the first reminder a couple of days after the invoice is due. While it’s not recommended to email reminders every day, it is acceptable to send a follow up a few days after the first notice — then again every week or so until the debt is paid.

Tips for Sending Reminders

  • Don’t make it personal
  • Never harass or threaten
  • Aim to retain a positive relationship

RELATED: Drafting Debt Collection Letters

9. Pick Up the Phone

If your client isn’t responding to your reminders, it’s time to pick up the phone. It’s possible that your client is a “Forgetful Fred,” in which case the phone call should resolve the issue quickly. 

If not, a phone call conveys you’re serious about collection. It also allows you to get a better sense of the situation your customer is in, and how to proceed. 

Tips For Effective Phone Calls

  • Be Respectful: Always be polite and respectful when speaking with the debtor.
  • Be Direct. Let the debtor know why you are calling and what you expect them to do.
  • Listen & Respond: Give the debtor a chance to explain their situation and respond in a helpful way.
  • Set a Deadline: Make sure to set a reasonable timeline for when you expect payment.
  • Follow Up: After the call, follow up with emails or letters to remind them about their debt and the deadline.

10. Withhold Products or Services

If you’ve stopped receiving payment from your client, and are suspicious payment won’t be coming imminently, it makes sense to stop providing your product or service. 

Notify them that you won’t resume the service until they pay, incentivizing them to pay off their account. 

11. Send a Demand Letter

A demand letter is a formal letter sent to a person or business to demand payment. It usually includes a detailed breakdown of the debt, how long it’s been outstanding, and the consequences of non-payment. 

It’s an appropriate step to take when a customer hasn’t responded to multiple payment reminders.

Writing a Demand Letter

  1. Include the recipient’s name, address, and contact information, as well as your own.
  2. Specify the amount of money that is owed, including any applicable late fees or penalties.
  3. Include the date the debt was incurred, the goods or services provided, and any other relevant information.
  4. Explain the consequences of non-payment. Make it clear that legal action may be taken if the debt is not paid.
  5. Specify the date by which the debt must be paid in full. The original past due invoice date can still apply unless you decide to offer new terms.
  6. Sign the letter to make it official.

Delivering a Demand Letter

  1. Send the demand letter by certified mail. Certified mail ensures you have a paper trail with proof of delivery.
  2. Follow up with a phone call to make sure they know the consequences of non-payment.
  3. If the recipient doesn’t respond to the demand letter, you may need to take legal action to collect the debt.

Use a Collection Agency to Send Letters

Many businesses work with collection agencies for help streamline the process of sending demand letters. For example, IC System offers a cost effective service to send demand letters on your behalf. 

12. Send a Pre-Collect Notice 

Some customers may see a pre-collect notice as a wake-up call that their debt is going to get them into serious trouble if it is not addressed. This can be a motivating factor for them to take action and make arrangements to pay off the debt.

Sending a pre-collect notice can help preserve your relationship with the customer since it provides an opportunity to discuss payment options and negotiate a payment plan. It’s also a reminder that you are willing to work with them before taking legal action.

It can also serve as a reminder of the consequences of not paying the debt, such as legal action or damage to their credit score.

RELATED: Best Small Business Debt Collectors

13. Send An Intent to Sue

An intent to sue letter is different from a demand letter in that it is a very formal warning that you will pursue legal action if the debt is not paid. 

When sending a letter of intent to sue, it is important to remain professional and to remain focused on the facts. The letter should not include any threats or accusations, as this could be seen as a form of harassment.

It is also important to provide the debtor with an opportunity to respond and to settle the debt before a lawsuit is filed. The letter should be sent via certified mail, return receipt requested, so that there is proof of delivery.

It is not necessary to hire a lawyer to send a letter of intent to sue. However, if the customer fails to pay, then it may be necessary to hire a lawyer to pursue legal action. It is important to understand the legal process and the applicable laws before taking any legal action. A lawyer can provide advice and guidance on the best course of action to take.

Finally, be sure to follow through on the threat of legal action if the debt is not paid. Sending an intent to sue is a serious step, and it shouldn’t be an empty threat. If it’s gone this far, taking legal action may be the only way to collect the debt.

14. File a BBB Complaint

Specifically for B2B collections, the BBB (Better Business Bureau) provides a platform for businesses to report companies that have failed to meet their contractual obligations or engaged in unethical business practices.

How BBB Complaints Work

  • Complaints are sent to the offending business in about two days.
  • The business is asked to respond within 14 days.
  • You will be notified about the response (or if there was no response).
  • Normally complaints are closed within 30 days.

In some cases, the BBB can also help to mediate between the two parties and work to resolve the issue. 

15. Notify Credit Bureaus

Reporting to the major credit bureaus can help you to get paid, but it’s also very important to follow the rules and regulations. 

When done properly, credit bureaus will report the debt on your delinquent customers credit report, which affects their credit score. This incentivizes them to pay because it makes it difficult for them to obtain new credit until your debt is paid off.

Business & Consumer Credit Bureaus

Credit BureauBusiness CreditConsumer Credit
Dun & Bradstreet (D&B)

How to Notify Credit Bureaus

  1. Before sending any notices to credit bureaus, contact them to ensure that you are following the correct process.
  2. Collect all the necessary documents, such as the original loan agreement, account statements, and payment history.
  3. Create a notice that includes all the necessary information, such as the debtor’s name, address, and the amount of the unpaid debt.
  4. Send the notice to the credit bureau via certified mail with a return receipt requested.

Finally, be sure to do the right thing and notify credit bureaus again when the debt has been paid off. 

16. Offer an Incentive

Offering an incentive for payment can be an effective way to collect, especially if you’re dealing with a Struggling Sam. While you shouldn’t be too giving, an incentive may allow you to save time, effort, and resources in the future. 

17. Consider a Payment Plan

Before offering a payment plan, determine the amount the customer owes, and create a payment plan that should work for both of you. Be sure to include the total amount owed, the amount of each payment, the due date for each payment, and acceptable payment method(s).

Once you create the plan, be sure to communicate it to the customer in writing. This should include a description of the payment plan, the payment amount, and the due date for each payment.

If the customer fails to make the payments, take action to enforce the payment plan. This may include sending a reminder letter or taking legal action.

18. Offer a Discount

Offer a discount for payment of the invoice in full. Explain that the discount is an incentive for prompt payment and that the discount is dependent on the payment being made within a certain time frame.

If payment is not made within the agreed upon time frame, consider other payment options such as a payment plan or other arrangements.

Consider a Discount if…

  • The customer has a long-standing relationship with your business.
  • Your business needs to increase cash flow quickly.
  • They are facing financial difficulty due to an illness or medical emergency. 

19. Negotiate a Settlement

  1. Research. Research the debtor to understand their financial situation and determine the likelihood of them being able to pay the debt.
  2. Contact. Once you have established contact with the debtor, make an offer to settle the debt. Be sure to offer an amount that is reasonable and that you can afford.
  3. Negotiate. If the debtor does not accept your offer, then you will need to negotiate. Try to come to an agreement that is fair for both parties.
  4. Payment Terms in Writing. Once you have reached an agreement, put it in writing. This document should include the amount of the settlement, the date of payment, and any other details that were discussed.
  5. Follow Up. Finally, make sure to follow up with the debtor to ensure that the debt is paid. If the debtor fails to make payment, you may need to take further action.

20. Get a Post-Dated Check

While less common these days, if a customer knows they will have sufficient funds available on a certain date, they can post-date a check to help budget for your payment.

Have your customer write the check with the agreed-upon payment amount and date, and then hold the check until then. This helps to ensure that the check is not cashed prematurely, before the funds are available.

21. Use Skip Tracing to Find Debtor

Skip tracing is the process of locating individuals who may have moved, changed their name, or are otherwise difficult to locate. It involves researching public records, social media, and other online sources to find contact information, verify employment, and locate assets to secure debt.

Consider skip tracing when other attempts to contact a debtor have failed or if contact information is out of date. Also, it can be time consuming when done manually so it’s often best to seek the help of a professional skip tracing service.

22. Utilize Small Claims Court

How exactly to sue in small claims court varies depending on what state you’re in, but generally you’ll need to begin by filling out a plaintiff’s form. The court will assign you a court date, on which you’ll present evidence showing that you provided your product or service and received no payment. The judge will then legally mandate that your debtor pays you what you are owed. 

Overview of Small Claims Rules

General Requirements for Small Claims

  • Only civil cases (no criminal allegations)
  • Judgements less than $10,000
  • Within 4 years of the break of a written contract
  • Within 2 years of the break of an oral contract

Chart of Small Claims Dollar Limits by State

How to collect your judgment will vary slightly state to state, but generally you will get a writ of execution specifying your judgment. You will then bring this to the sheriff, who will facilitate the collection and pay you what you are owed. 

If you have the time and resources to collect your debt on your own, and the less labor intensive options haven’t worked, a small claims court can be a great resource in collecting what you’re owed. If you don’t have the time, or don’t want to go through the stress of legal proceedings, you may want to consider utilizing a third party debt collection service. 

23. Be Aware of Bankruptcy

If you are trying to find out if a customer has gone bankrupt, use the PACER website to search for a bankruptcy case. The next step is to contact the bankruptcy court in the jurisdiction where the customer resides. Try locating the contact information for the bankruptcy court on the court’s website.

If you find out a customer has filed for bankruptcy, it is important to understand the rules of bankruptcy and how they affect the ability to collect on unpaid invoices. Depending on the type of bankruptcy, there may be limitations on the ability to collect on unpaid invoices, or the customer may not be able to pay them at all. 

It also might be better to work with the bankruptcy court to try to collect the debt rather than trying to collect from the customer.

24. Hire a Lawyer

If you’re pursuing a debt for more than your state’s small claims limit, instead you’ll need to file a civil suit. In order to do this it’s important to hire a lawyer. It generally makes sense for cases of $40,000 or more.

When looking for a lawyer, it’s important to find someone who has experience with debt collection. Just because a lawyer is experienced in entertainment law does not mean they will be effective in pursuing debt. 

A lawyer will help you collect debt by filing legal proceedings in civil court. These proceedings, if successful, will allow the state to garner wages and place a lien on your debtors assets in order to allow you to collect. 

25. Hire a Debt Collection Agency

Debt collection can be hard. Many small businesses don’t have the time, energy, or resources to try and negotiate payment plans, prepare small claims suits, and track debt status of all their accounts. Debt collection services can help you recover what you’re owed for a price — usually 25% to 50% of the outstanding invoice.

While debt collection agencies can be pricey, they boast success rates of 85% and in most cases you don’t owe anything unless they collect.

Benefits of Debt Collection Services 

  • Professional experience recovering debt 
  • Takes the burden of debt collection off your plate 
  • Industry specific knowledge 
  • Legal experience 

Two of the Best Services

Prestige Services Inc.

Prestige Services Inc. is an industry leader offering a comprehensive service designed to help small business owners. They utilize a multi-faceted strategy which includes skip tracing, legal means, and post judgment collection to ensure debt is collected. 

PSI’s fees are also some of the lowest in the industry.

Prestige Services Inc. Highlights

  • Competitive rates
  • Accredited with the BBB for over a decade
  • No fee if they can’t collect
  • Established in the Industry 
The Kaplan Group

Specializing in claims over $10,000, The Kaplan Group is a great option if your debt is too large to be resolved in small claims court. With an 85% success rate, they are an industry leader in B2B collections. You won’t be charged a fee if they don’t collect. 

The Kaplan Group Highlights

  • No fee if they can’t collect
  • Flexible service
  • Competitive rates for large amounts
  • In-house law firm

What NOT To Do

Do NOT ignore state & federal debt collection laws

Be aware that strict rules apply specifically to debt collectors.

Research your state’s debt collection guidelines before pursuing a debt. Some states have even stricter rules than the Fair Debt Collection Practices Act.

Do NOT Task Salespeople to Collect Debt

Tasking salespeople to collect debt isn’t a good idea because it is not their job. Salespeople are trained to focus on selling products or services and are not equipped to handle the complexities of debt collection. 

As you should know by now, debt collection can be a difficult and sensitive process, and salespeople may not have the necessary skills or experience. Furthermore, having salespeople handle debt collection is a distraction from their primary duties and can damage their relationship with the customer.

Do NOT use aggressive language or make personal threats

Using aggressive language or making personal threats when collecting business debt is not appropriate because it is not professional and could potentially result in legal action against the business.

Do NOT threaten legal action if you can’t follow through

Threatening legal action and not following through can be seen as a form of harassment, which is illegal. Additionally, it can create a hostile environment and may even lead to a lawsuit from the debtor. Finally, it may make the debtor less likely to cooperate with you in the future.

Final Thoughts on Collecting Business Debt

Collecting debt can be awkward, difficult, labor intensive, and stressful. After your client gets what they bought, the work should be over. Unfortunately, too often that isn’t the case. 

Luckily, there are many strategies you can use to get what you’re owed. Small claims court is relatively easy to navigate, and is highly effective. 

If you don’t have the time or confidence to collect yourself, we recommend working with a professional debt collection service like Prestige Services Inc. or The Kaplan Group.

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