Business Debt Collection

Many businesses struggle because their debtors do not pay them in time, causing severe cashflow problems. Therefore it is vital to get on top of chasing business debts - in times of recession especially it can mean the difference between your business surviving or failing.

This page is a resource guide to how to collect business debts.

There are two kinds of debtors businesses have to deal with - retail customers who have bought goods or services but haven't yet paid, and business customers who have bought services or goods but haven't paid.

Generally speaking, retail customers arn't a problem as most businesses charge them upfront when they purchase. The only exception is the provision of services which incur a monthly bill - provision of utilities such as gas, electricity, internet and phone services and financial services such as credit cards.

However it's a different story with business customers. Most business customers are invoiced and pay 30 days after the goods are delivered. But in practice many pay later. This is particularly the case where you have big contracts and are dealing with a large company that uses your dependant relationship with them to delay payment for their own cashflow reasons.

Your business debt collection options

It all depends on how important the customers you are collecting from are.

1. If you are dealing with retail customers whom you think you won't do business with again, one option is to sell the debt on to a debt collection agency. But note you will only get about 30 cents to the dollar on the face value of the debt, and the debt collection agency may have methods that might bring your company into disrepute if they become widely associated with your business. However selling the debt will give you an instant cashflow boost, as well as save you future administration costs. If you have cashflow problems, this might be the best option for your business.

2. If you are dealing with business customers, chances are you have a long-term relationship with them and do not want to jeopardize it. In this instance, the first thing to do is to organise your collection team to send polite but prompt chasing letters for the debts - you will find that most pay up on receipt of the chasing letter, so there is no need to get nasty or threatening - just a reminder will do. One small business I know of had an admin team that sent out the invoice once, and then filed it away. The invoices were never chased up, which led to hundreds of thousands owed not being collected. If you don't chase up your invoices, the other party will assume they have a licence to "forget" about the bill. Often the excuse is "you didn't remind us". Therefore setting up a reminder system is the first step to ensuring you get paid. It needn't cost you anything more as this task can simply be added to the duties that your existing office book-keeper or secretary are responsible for.

If your invoices haven't been paid for a while, but you have severe cashflow problems, another solution is to look at factoring. Factoring invoice discounting is where you sell your invoices to a third party for a discount. This transfers ownership of the invoices, and you have no further contact with the customer. This is not recommended where the customer is a particularly valuable one. However, in a credit crunch situation factoring might be the only solution, as factors will provide cash for invoices even when banks will not lend to you with the invoices as collateral (because the factor considers the creditworthiness of the customer who was invoiced when making their offer, while the bank making the loan will only be considering the credit worthiness of your company). Note also when you employ a factor, you won't get the full value of your invoice. If the factor demands a deep discount, you may even make a loss if the amount offered does not cover the costs you incurred in providing the goods and services.

Making sure you only deal with credit worthy customers

If you are careful about the creditworthiness of the companies you do business with, chances are you will reduce the problems you have with unpaid invoices sharply. But can this be done cheaply and in-house? There are some things you can do to help yourself.

1. Bank references. When taking on a new customer, get an agreement signed, where the customer consents to allow you to take up bank references. This is known as a "request and consent form" where the customer fills in details of their bank, and signs a consent at the bottom allowing the bank to release a status report to yourself (your details must be on the form too, as this cannot be a generalised consent form that anyone can use). Once the customer has signed this, send it off to their bank, who should then provide you with a status report and charge you a fee for the report. Don't be put off by the fee - if your business with the customer is for a large amount that can bankrupt your company if unpaid, it's well worth paying the bank fee for the status report before you go ahead, to ensure you arn't dealing with anyone dodgy.

The banks will only use standard phrases in their report - ‘customer not known to us for long’, 'undoubted for your figures’, 'cannot speak for your figures', ‘respectable and good for your figures’, 'capital/resources fully employed', etc.). Note that anything less than 'good for your figures' is a guarded warning, and you should not go ahead.

2. Trade references. Write to businesses that the customer has dealt with and ask them how long they have known the customer, the terms (30 days or longer), the amount of the sales, were payments prompt, number of contacts before payments were made, and any other information that may be of use. End your letter by thanking them for their help and add that you are happy to reciprocate at any time if they need to ask for trade references. If you do get asked to give a trade reference on a customer in return, deal with it honestly and promptly. Businesses can help each other by letting each other know when there is a dodgy customer on the scene. It's important you select whom to get the references from (the customer will only tell you about their good relationships and will try to hide their bad ones).

3. Check on the internet. The value of the net is that whenever there are disgruntled customers, they go online and pour out the whole story for everyone to read. Do a general search for the business customer concerned, and then narrow your search with queries such as "problems with xyz" and "problems getting xyz to pay", "unpaid bill problems xyz" "xyz business problems". Do quite a deep search - i.e. don't just confine yourself to the first page of the search results, have a look at the first ten pages in case there is something buried deep in the results. It's time consuming but could save you a load of headaches in the future. Keep a note of anything interesting you find on file together with a note of the URL of the page you found it on, so you can go back to it later if you need to. Firms who have a lot of customer complaints tend to lose customers, which in turn puts pressure on their business.

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