Collecting debts:

Debt collection is critical to any small business.  With limited capital, collecting payments for every business transaction becomes crucial to keepting the business afloat.  At some point you may run into a situation where you have to collect outstanding debts (also known as Accounts Receivable).

Follow these steps to engage in debt collection.

Step 1: Develop Written Policy:

If you're going to offer debt to anyone you should develop a written policy that stiuplate the circumstances under which credit may be granted and the procuedure that must be followed. Create a credit application form. Your policy must stipulate these key points:

1. Payment terms: This is how long will the customer have to pay. This could be on a Net 15, Net 30, Net 60 or Net 90. In other words they have to pay within 15, 30, 60 or 90 days.
2. Interest: What interest will be added to the outstanding debt if it is not paid on time. Interest payment is covered in the Truth-in-Lending Act. State laws limit the amount of interest you can charge.
3. Collection Procedures: Stiuplate the procedures that will be followed in order to collect the debt. It should state how often the individual will be contact, when they will be contacted, the methods that will be used to contact them (email, phone, letters, etc.).
4. Contact Information: The application form must collect all relevant contact information to include, name, address, phone number, email address, etc.
5. Discontinuation of Service: It should stipulate when all services to the debtor will be discontinued. It should also stiupulate when the debtor will be notified of such discontinuation of service.
6. Record of Communication: It should stiuplate how all communications with the debtor will be recorded and maintained in the debtor's file.
7. Debt Collection Notification: Stipulate when the debtor will be notified that collection will be turned over to a collection agency.

Step 2:  Attempt to collect the debt yourself:

When attempting to collect outstanding debts abide by the following rules:

1. Designate someone to perform this task. This person will be the only individual that the debtor will correspond with.
2. Make sure that all communications procedures are followed.
3. You can offer discounts in order to reduce the outstanding amount and give an incentive to the individual to pay off the debt.
4. If every attempt to collect the debt fail you have two options. You can take legal action (such as mediation, arbitration, collaboration or small claims court). If you wish to avoid the legal route you can refer the case to a collections agency.

Step 3:  Legal Action:

You have the option to pursue legal action aganist the individual to collect outstanding debts. These actions could result in mediation, arbitration, collaboration or small claims court. This course of action incurrs legal fees that could place your business at a financial disadvantage if the legal fees outweight the amount that is outstanding.


Step 4:  Collections Agency:

 If you pursue the collection agency route you should be aware that collection agencies can charge up to 50 percent of what they collect from the outstanding amount as a fee to collect the debt.   If you chose this route you should ensure that the collection agency do the following:

1. Collection agencies must be licensed and bonded.
2. They should operate under the Fair Debt Collection Practices Act.
3. Check with the federal Consumer Protection Agency or the state Consumer Protection Agency office to find out if there were any greviances filed against them.


Step 5:  Report to Credit Bureau:

Reporting to a credit bureau could result in adverse data in a debtor's credit report. This gives your business leverage in getting a favorable response from your debtors. You have the option to report the bad debt to credit agencies. As a small business you can do this in one of two ways.

1. You can hire a credit reporting service company (also known as 3rd party processors)  to do it for you. 

- MicroBilt
- Lyon Credit Services
- The Service Bureau

2. You can join a credit reporting bureau and report directly to them. In order to use this option you must have a certain number of customer payment histories and a specified minimum number of open accounts with debtors.

- TransUnion
- Experian
- Equifax