Collecting Debts Owed to Your Business

It’s an age-old problem: how to get customers or clients to pay on time. If you do nothing, probably nothing will happen. Caveat: Before you take any drastic measures, make sure you operate within the boundaries of the law. This includes both federal law—including the Fair Debt Collection Practices Act and related legislation—as well as any state and local restrictions.

So what can you do? 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.

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.

*Use the personal approach. Don’t always start out by sending a computer generated form letter. This may be considered a “temporary reprieve.” A straightforward call reminding the debtor that the account is overdue is usually more persuasive. Key point: Be sure to ask when the bill will be paid.

*Follow up. If a personal communication does not produce payment, follow up with a registered or certified letter detailing (1) the amount owed, (2) the prior 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.

*Word additional follow-up letters more strongly. State any additional measures you will take, including litigation, if payment is not received. Caution: Postcards used to demand payment could lead to civil and/or criminal liability under federal law.

*Be business-like. Avoid sarcastic remarks and name calling. Be truthful and don’t pretend you are someone you are not. And do not make your collection letters look like they are coming from a collection agency.

*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 satisfactory results.

As a last resort, you may be entitled to a tax deduction for bad business debts. We can provide more details upon request.

Practical advice: Don’t back down if this is the only way to solve the problem. With the help of your business advisers, you can determine the appropriate action for each particular situation.

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