An Overview of Debt Collection for Small Busines

For many small businesses, getting the sale is just the first step in the process. Many small businesses rely on extending credit to the purchasers in business to business transactions. As a business with many transactions, purchasing on credit from a seller can be ideal as processes are streamlined: purchase as necessary and then making payments within a set period of time. Given the thin cash reserves for many small businesses, having the flexibility to pay at a later date is necessary due to periodic cash flows. All in all, this system of seller-financed credit (the seller not requiring payment at the time of the sale) allows small businesses to flourish.

However, despite the agreement to pay, the purchaser may not always make good on the agreement, and as the seller providing the purchaser’s credit, you may be stuck with attempting to collect on that debt. The failure of the debtor to pay the bill can result from a few possibilities. First, the debtor could have simply forgotten to pay the bill in an administrative oversight. Second, the debtor could be illiquid or have insufficient cash on hand to pay the bill. Third, the debtor could be refusing to pay due to an issue such as nonconformity of goods (the goods received weren’t what they ordered). Finally, the debtor could be refusing to pay in bad faith in hope that you as the creditor will not attempt to collect on the debt, or would be willing to collect at a reduced amount. Regardless of which of the above is the case, you need to act to resolve the outstanding debt.

If you’re a small business owner and have a bill that has gone unpaid, consider the following steps:

  1. Contact the debtor in a calm and collected manner to let them know that you are aware that the bill is past due and that the bill needs to be paid. Often, this call can resolve the issue in a timely manner.
  2. If the debt is not paid as a result of the first phone call, send an official letter via certified mail to the debtor identifying the debt, the original payment date, and the demand for payment with a specific date. All correspondence should be recorded.
  3. If the debt continues to remain unpaid you have four options:
    1. contact the debtor and offer to reduce the amount to be paid if paid immediately;
    2. hire a collection agency specializing in business to business debt recovery;
    3. sell the outstanding debt for a discounted rate; or,
    4. consult with your attorney regarding filing a lawsuit to attempt to recover.

Please note that the above steps are specific to business to business debts – consumer debts are governed by a complex set of federal and state laws that control the interaction between the debtor and creditor. While the above steps are a general overview of debt collection for small business, each situation is slightly different and should be handled in consultation with an experienced attorney.