Many first-time business owners are surprised by the number of concerns that come with running a new company. You expect to worry about your product, beta testing, marketing, and how to hire the best staff. But, how to collect on debts is rarely one of the first things entrepreneurs consider; perhaps it should be. Because newer companies often run on very thin margins, and sometimes are forced to work with other less established companies, who are more likely to default on debt than established companies, commercial debt collection can be a huge concern. Here are five things you need to know about debt collection.

1. Fraud is a common source of unpaid invoices.

Companies donít pay their bills for a variety of reasons. In some cases, the company doesnít have the money. In some cases, the company never planned on paying in the first place. Both businesses and people can be victims of fraud. Basic research and credit reports are a cost effective and efficient way of preventing becoming the victim of an intentionally fraudulent company. Many credit reports are inexpensive and many research methods, such as double checking addresses and reading reviews on sites like Glassdoor and the Better Business Bureau are absolutely free.

2. Good contracts can prevent bad debt.

The same way that good fences make good neighbors, good contracts make good clients. Your contracts should always be reviewed by a lawyer, and if possible, someone with experience in collections. The contracts should include payment terms as well as penalties and fees for late payments (some states have limits on how much can be charged in late fees, which is another good reason to involve a lawyer). The contract should also spell out what acceptable delivery of the goods or services involves, to avoid later arguments about whether or not the job is complete.

 

    

3. Communication is key.

The first step to collecting on any debt is to send an invoice. Too often businesses, especially smaller or newer businesses, donít keep good records and forget to do simple things like invoice when money is due. The longer you wait to send your invoice, the longer it will take for you to be paid. When you communicate with clients about money, make sure you do so professionally and politely. Phone calls are generally more effective than emails when it comes to getting people to discuss the situation. However, sometimes emails are necessary to create a paper trail. Communication should be kept direct. Never try to use social media to publicly shame someone into paying you.

       

    

4. Debt collection is complicated.

There are many laws about collecting debt and those laws vary by the type of debt (personal or corporate). They also vary by country and even state. Debt collection can also be time consuming. It can take months and years to finalize a collection. Unfortunately, studies have shown that the longer a receivable is past due, the less likely you are to be able to collect on it. For example, only 74 percent of receivables that are three months past due are collected. By the time an invoice is seven months past due there is less than a 50 percent chance of getting paid. It is very unlikely that an untrained debt collector can quickly and effectively collect on your unpaid bills.

5. Debt collectors can help you.

Owing money, or being owed money, are both emotional positions. An experienced debt collector knows how to navigate the emotions without causing ill-will or saying things a business owner might later regret. An experienced debt collector can also quickly tell when itís in your best interests to make alternate arrangements with a debtor, or when a debt is uncollectable. Too often, an inexperienced debt collector may agree to less than favorable terms when negotiating with a more experienced adversary. Simply put, you wouldnít let an inexperienced sales person or lawyer represent your business, why would you leave debt collection to someone inexperienced?

Running an early stage business is full of highs and lows. Understanding a little bit about commercial debt collection can remove some of the stress and worry.

   

     

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