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Posted: May 17, 2010

Six simple steps for collecting overdue accounts

It might not be fun, but it can be less stressful

Daniel Hannaher

All small business owners know that collection overdue accounts is especially difficult during a down economy. It's not the most pleasant part of being an entrepreneur, but not handling them expeditiously will almost certainly endanger your business's cash flow and long-term viability. The following are six simple steps that may make the collection process less stressful and more effective.

1. Avoid late payments by your customers. Establish a standard policy for payment and make your customers aware of them before starting work. If you don't have a formal contract, have your customer sign your "Terms and Conditions." Do you require a full or partial payment upfront or will you offer payment terms such as Net 30? Clearly state any surcharges for late payments.

2. Loose credit terms can create bad debt. If you provide goods or services on credit, develop qualification standards that are specific, yet fair (e.g., a good credit history from a credit bureau or good bank references). Put your credit policy in writing and make sure all employees understand it. You should also have the policy posted in your store, or available as a handout.

3. Enforce your credit terms on all transactions. Your collections policy will do no good unless you enforce it. You will be amazed what a personal phone call can do to encourage a timely payment. If you've met your obligation and a customer has not, you're entirely in the right.

4. Keep communications channels open. Don't assume the customer is entirely wrong. Always stay in touch, and make sure they are satisfied with your product or service. If they become delinquent ask politely for an explanation. It may well be that the invoice has been lost or is awaiting approval. A customer with cash flow problems may request extra time. Based on your experience with the customer, you may feel confident enough to allow extra time or installment payments. Make sure you and the customer clearly understand any compromise.

5. Don't be afraid to take legal action. If your collection attempts fail, it may be time to turn to an attorney or collections firm. Your course of action will depend on the situation. You may decide the amount of the overdue account does not justify the cost and effort to collect. If so, write it off as a bad debt and move on.

6. Don't make the same mistake twice. Should customers with poor payment histories approach you about working with them or restoring credit, don't immediately refuse unless you are absolutely certain they remain bad risks. Determine if the situation has changed and decide whether it makes sense to restore the relationship. As a precaution, insist on stricter terms such as advance payment or cash-only.

The SBA has a number of resources available to advise business owners on the right course to take when establishing a collection policy. For more information, visit www.sba.gov or call the SBA's Colorado District Office at 303-844-2607.
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Daniel Hannaher is the SBA's Region VIII Administrator based in Denver. He can be reached at Daniel.hannaher@sba.gov.

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