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Six Ways to Improve Debt Collection

Date: July, 2010

In the current economy, it is not enough to generate sales. It is just as important to ensure that your business is actually paid for your services or products. That is why debt collection is increasingly becoming a concern of small-business owners.

 When pursuing debt collection activities, be careful to avoid violating any federal laws designed to protect debtors, including the Fair Debt Collection Practices Act and related legislation. In brief, you may be fined or forced to pay damages, or both. State law may also restrict these practices. In addition, debtors may be able to initiate civil actions. 

 The key is to maximize collections for your business without exposing it to liability. Here are six practical suggestions:

 1. Monitor your accounts payable. If a client or customer thinks you have forgotten about a bill, it may become a low priority. If the payment term is the standard 30 days, don't let nonpayment go unaddressed for more than another week or two.

 2. Use a "personal touch." Don't always start out by sending a computer-generated form letter. This may be considered a temporary reprieve. A straightforward call reminding the debtor that the account is overdue is usually more persuasive. Key point: Be sure to ask when the bill will be paid.

 3. Follow up on your initial contact. If a personal communication does not produce payment, follow up with a registered or certified letter detailing the amount owed, the prior invoice date and the date on which the goods were delivered or the services were provided. Make sure you have written proof that you performed your part of the bargain.

 4. Additional follow-up letters can be worded more strongly. State any additional measures you will take, including litigation, if payment is not received. Caution: Postcards used to demand payment could lead to civil and/or criminal liability under federal law.

 5. Act in a businesslike fashion. Avoid sarcastic remarks and name calling. If you spread the word that a customer is a bad risk, you risk a defamation lawsuit. Be truthful, and don't pretend you are someone you are not. And don't make your collection letters look like they are coming from a collection agency.

 6. Stay out of court if you can. You might try to arbitrate the dispute, especially if the debtor claims there is a problem with the goods or services. Alternative dispute resolution is faster and less expensive than court and often produces satisfactory results. As a last resort, you may be entitled to a tax deduction for bad business debts.

 Do not give up easily when a client or customer stonewalls.  With the help of your professional advisers, you can determine the appropriate action.
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