Rule #1 in collecting debts: The longer a debt is owed, the less likely you are to collect it. Rule #2 in collecting debts: Some people won't pay, no matter what. A system for collecting the money your customers owe can help you keep going, with Rule #1 in mind and minimizing the number of people who become Rule #2.
Set up your debt collection system when you first start your business, keep tweaking it to improve your collections, and you will maximize your cash flow from receivables.
Before you start your business, take some time to determine how you will bill customers. Putting together a billing system and plan will help you collect more money faster. How often will you bill? How will you communicate with customers who owe you money? Will you make phone calls? Send letters? Both?
Don't wait until you have a ton of receivables to collect. Start now to develop that system, always remembering Rule #1.
The Fair Debt Collections Practices Act (FDCPA) does not apply to business debtors, but you must abide by it when attempting to collect money from consumers. The Act protects consumers against harassment and privacy violation by creditors and it regulates who you can contact, how often, and how you can represent yourself. Consumers can bring lawsuits against bill collectors, so please read this article before you contact customers about debts owed to your business.
An accounts receivable aging report is an important tool to help you monitor outstanding bills and see what needs to be collected. This report can show you who owes how much and how long it has been unpaid. With this information, you can set your collections strategy for individual customers.
Small claims court is a good possibility for collecting money owed you, if the amount owed is small (under the small claims limit for your state) and you don't expect to do business with this customer again.
Remember Rule #2 above? Some people just won't pay, no matter what you do. So, what now? Find out how to write off a bad debt at the end of a year and take a tax deduction for the loss of sales.
Selling accounts receivable is a common business practice called "factoring." You can sell your receivables to someone who will pay you for them - at a discounted value, of course. Then the factor collects the money. If you are short of cash, factoring can be a good way to raise some quickly.