Collecting debt is an unfortunate part of the job for many small businesses. The process is time consuming, frustrating and may not end up achieving the end goal that is to collect the money owed. To further compound matters you may have to invest additional time and money to get back what is due. There are several strategies a small business can employ when collecting their bad accounts.
Leverage to Collect the Debt
If you have the capacity to reach out to the account holders, and if you are comfortable doing so you can coordinate the collection process. If you are met with resistance from the debtor there are several actions you can take.
Impact on Credit Score
Notify debtors that if the debt is not paid you will report them to a credit reporting bureau. The bureaus and scoring systems are different, but both individuals and businesses have credit scores. Carrying debt and being reported for it can negatively impact a credit score. It is against the law to lie about reporting a debtor to the credit reporting bureaus, so before you do anything make sure you understand the law.
Send a Demand Letter
A demand letter is written by an attorney and sent via certified mail. Whether or not a demand letter works depends on the individual debtor. Some recipients will be motivated to take action to resolve the matter when they receive a letter from an attorney. Some debtors will not care and will call your bluff. A demand letter is either effective or lays the groundwork for legal proceedings if that is a path you decide to take.
Offer to Settle the Debt
If it does not appear likely that the client will pay what is due you can ask them to pay a lesser amount than what is owed. If they agree and pay the amount you suggest you end up getting something, which is better than nothing. This is still not the full amount plus any interest that accrued, so you are losing money just not as much money.
Work with a Debt Collection Agency
If your efforts have been unsuccessful, you can work with a collection agency. Some people are not comfortable doing this type of work or do have the capacity depending on their workload, so an agency is a great alternative. Sometimes delinquent account holders can be a challenge so that outsourcing may be your best option.
Pay Structure for the Collection Agency
Debt collection agencies are paid by taking a percentage of the debt they collect. The percentage is agreed to ahead of time. If the collection agency collects the full amount you will be paid that amount minus the agency’s fee. If the agency can collect a partial amount of what was due that means you will see even less by the time their fee is subtracted.
Determine the Value of Working with an Agency
If you work to collect a debt you are investing your time. Outsourcing this work to a collection agency costs money. If the amount of the debt justifies your efforts or payment to a collection agency, it is worth it. If not, consider settling for a lesser amount or possibly selling the debt.
Find a Reputable Agency
There are laws around debt collection. You may not understand the intricacies of these laws, but a reputable collection agency will. Laws vary from state to state, so keep this in mind. Make sure you work with an agency that is both licensed and bonded. Each state has a collection agency administrator, and they can provide more information of specific agencies.
Work with a Collection Agency That Understands Your Industry
Not all collection agencies are the same, and finding the right partner can make all the difference. Hire a collection agency that specializes in your field. If they understand the nature and culture of the industry, they will be more likely to collect the debt.
Sell the Debt
Sometimes a collection agency may offer to buy the debt. The offer will be less than what is due, but it is guaranteed money. It also officially stops the debtor from being your problem. The collection agency will take on the debt, and they will try to work out an arrangement with the debtor. It can be frustrating to accept less than what you were due, but the tradeoff is that you get something and the problem goes away.
Set Up Your Small Business to Successfully Collect the Debt
Handling bad accounts takes work, and it can be exasperating. The way your small business handles a bad account can impact the chances of that debt being collected. Your response can also affect your brand, reputation and standing within the industry. Following these steps can minimize the stress and effort necessary to collect on bad accounts.
