Lawyer Versus Debt Collection Agency: Collecting on Bad Business Debt

If you have exhausted all of the usual methods used to collect on an outstanding business debt (letter writing, phone calls, and meetings) it’s time to call in the “big guns.” Generally, businesses seeking to recover some part of their delinquent accounts will either enlist the services of a debt collection agency or hire a lawyer who specializes in debt collection.


Which is the best way to go? The answer is that it depends. Many companies turn to a collection agency to collect their unpaid debt. The cost for the agency’s services depends on how much business is being brought in as well as the amount of debt that needs to be collected. Fees typically range from about 25% to 30% percent of the amount collected; though some agencies demand a split down the middle.

The main advantage to going with a debt collection agency is that they shoulder the burden of sending collection letters, making calls, and negotiating payment without charging the more exorbitant fees of an attorney. Business owners and their employees are thus free to focus on the important things- like running a business. Moreover, business owners who put an effort into finding a collection agency with a proven track record, can also take advantage of their experience in getting debtors to pay up. As a whole, the debt collection industry is growing and businesses on average can expect to see about a 20%-30% recovery on bad debt.

What about lawyers who specialize in debt collection? Choosing to go with an attorney can actually be more effective than a collection agency, especially in cases where legal action is a serious option. Most attorneys charge a minimum fee or require that the debt be of a minimum amount. If a business owner decides to take the debt to court, the attorney’s fees will be added to any court-related fees and charges connected with the lawsuit.

Many companies hire attorneys only after a chosen collection agency has failed them because they assumed the collection agency would be the cheaper option. But this is not always the case. While sometimes debt is quickly collected after a collection agency is brought in, the debt collection process can often be complicated and drawn out. In many cases it may be simpler to just hire a lawyer and go to court. Business owners should keep in mind, however, that if they are not planning to take delinquent customers to court, then they don’t need to hire an attorney.

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When Customers Can’t Pay on Time Flexibility is Key

Small business owners tend to wear many hats; they can be managers, marketers, IT technicians,accountants, and office assistants. But in today’s economy as valued customers struggle to pay their financial obligations, many small business owners are finding that yet another hat has been added: debt collector.

When customers withhold payment, the cash flow of the business is essentially compromised by an interest-free loan. One way to ensure that customers fulfill their obligations is to offer payment plans. Here are a few commonly used payment plans for outstanding accounts:

  • Create an installment agreement: Divide the money owed into equal payments, to be paid regularly over the next several months. To demonstrate goodwill, be flexible about the length of the payment period and the size of the payments.
  • Require a down payment: When you discuss a payment plan with a customer who hasn’t paid, it’s a good idea to require a lump sum partial payment at the start. You want your customer to know you are serious about collecting your outstanding bill.
  • Charge interest or a late payment fee: You might want to consider charging a low interest rate or a small late payment fee, since you are in essence lending your customer money.
  • Create a rule about ongoing business with your customer: Decide whether you will allow your customer to charge more goods or services. Do you want the bill completely paid off before the customer purchases more? Or would you prefer an active customer who slowly pays bills over a period of time?

Regardless of which options you choose, it is good business practice to have a written, debt collection agreement with your customers. Include consequences if payments are missed, and define what constitutes default. With a little flexibility and some carefully crafted payment plans, not only can you preserve your business’ cash flow, you can hold on to your valuable customers. It’s a win-win situation.

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Going to Small Claims Court to Recover Outstanding Business Debt

If you are thinking about going to small claims court to recover an outstanding debt owed to your small business, you may want to think again. The point of small claims court is that it gives the involved parties a chance to settle disputes while avoiding any more expensive and complicated court procedures later on. But often the hassle (i.e. the paper work, the pre-case preparation, and having to personally go to court) and the cost (in fees) of going through the small claims process outweighs any benefits.


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Moreover, even though several states have reported an increase in the number of claims being filed- especially among businesses seeking to recover a debt owed to them or consumers disputing a charge, many of the claimants are unable to collect on their debts even after wining their case. This is due to the fact that a claimant who wins a case is solely responsible for collecting the funds afterwords. Even if the claimant is eventually successful, it will come at the cost of even more time and even more money spent in fees.

If you decide that going to small claims court may still be a viable option for your small business, then you should at least make sure that you go into the process well-informed. For more general information on the small claims process you should consult sites like this one in Florida and this one in Texas. Be sure to also get information specific to the county in which you will be filing.


In Trying Times, Smaller Businesses Are Considering Credit Insurance

It used to be that credit insurance was exclusive to the large companies that could afford to pay the high premiums in exchange for a bit of financial peace of mind. Not any more. In response to the economic slowdown and an across-the-board reduction in consumer spending, now even small and mid-sized businesses are considering this risk management tool.

Credit insurance, also known as business credit insurance, protects the insured business from customers who pay late on their invoices or who become insolvent. Though insured businesses cannot get money up front, as in the cases of factoring or invoice discounting, credit insurance provides a safety net that protects these businesses from the financial suffering incurred due to a debtor’s protracted default, insolvency or bankruptcy.

Generally, companies that accrue a few million dollars in yearly revenue can get credit insurance. Small and mid-sized business owners should keep in mind, however, that premiums vary greatly depending on the size of a business and its industry as well as on the credit terms that the business extends to its customers (i.e. are invoices payable within 30 days versus 90 days).

Even so, credit insurance may be worth the cost for smaller businesses in exchange for the peace of mind it brings in these financially turbulent times.

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Cash Flow Tip – Business Cycle Coordination

One of the most important steps in attempting to calculate cash flow is breaking your business down into cycles.  Some examples of business cycles are:  inventory cycle, accounts payable cycle, sales cycle, and accounts receivable cycle. 

The key to smooth cash flow is to coordinate these cycles as much as possible with one another. Unfortunately for many of our clients, thorough coordination is difficult, sometimes impossible.  Inventory needs to be procured, products/services are sold, and only then are funds received from accounts receivable.  Unfortunately, overhead needs to be paid for and as well as inventory. 

The best solution is to try to negotiate with your vendors and find a payment schedule that works with your cash flow schedule.  You should also make sure you convert your sales to cash in the shortest possible time.  However, because many of your vendors and clients face the same issues you do, it is not infrequent that you will unable to put off paying invoices until people pay you.  Many of your vendors may not even be able to deliver a product or service before it is paid for.  If  this is the case in your business, you may want to look into alternative financing such as a small business loan, or a business cash advance.

Here is a more detailed article/post on Cash Flow.

Small Business Collections – 6 Tips

The most frustrating thing about running a small business is EVERYTHING that is out of your control.  One of these things is when your customers don’t pay you.  Here are some tips on collecting that money which is owed you already, and which you need NOW.  While you are waiting for your money, if you need some extra cash, you can consider getting a business cash advance.

Set Written Payment Guidelines – Before providing goods or services, make sure that the client has signed/initialed next to your payment guidelines.  Also, outline the guidelines clearly on your invoices.  If you want to offer a trade discount – giving a 1 or 2% discount to customers who pay quickly, this will often encourage payment – minimizing your cash flow issues.

Quick Invoicing – I wrote more about this in a previous article on minimizing cash flow issues.

Incentives – There are various types of incentives which will ease speedy collection, helping to minimize cash flow issues for a small business.  An example of a “carrot” incentive is a trade discount – giving a 1 or 2% discount to customers who pay quickly.  A “stick” incentive would be to charge interest for overdue accounts.  Many companies who charge interest will waive it in the event of a good faith payment.

Reminders – Many experts advise sending out multiple reminders; however, for small businesses my rule is: One reminder, then pick up the phone.  Depending on the size of your business, you might find that two reminders makes more sense – but the personal attention of a phone call can work wonders.

Present Options – Decide which options you want to offer someone who is not paying.  Do you want to offer them an altered payment plan?  Do you want to sue?

If You Sue – Make sure you have a good paper trail.  If the amount owed is within the limit for your county, you can sue in small claims court (no lawyer).  Make sure you have taken notes on all telephone calls and that you have the contract and paperwork with you.  Before filing, let the customer know what you are planning to do, and see if you can convince them just to pay you.  If you have any questions on how to sue in small claims court, contact your county clerk’s office.  Unfortunately, winning in small claims court doesn’t always mean you will actually get the money.  More often than not, just the threat of being sued will create the impetus to pay.

Improve Cash Flow: 8 ways to Getting Receivables Sooner

Our customers come to us when they are in a cash flow crunch.  Many of them are running very successful businesses, only the timing of their payables and Receivables is simply a bit out of sync. 

Here are 8 things you can do to shorten the time between when your customer wants something, and when you get paid.

1)  Accept Credit Cards and/or PayPal (for internet businesses) – When you accept credit cards, you also qualify yourself (after a few months) for great cash flow rescue option like a business cash advance.

2)  Encourage your customers to e-mail or fax orders –  Mail takes more time.  The sooner you receive the order, the sooner you can send out an invoice and get paid.

3)  Send out a clear, organized invoice immediately – Use software, or make your own template, just make sure that you have invoices ready, so that the moment you get an order, you can send out an invoice.  Make sure that the due date and the trade discount/late fee are displayed prominently.

4)  Offer a trade discount – This is a discount (even just 1 or 2%) that you give your customers if they pay you within a certain amount of time.  Often this small incentive will encourage your customers to pay immediately. 

5)  Due Diligence – When taking on a major customer, call their other vendors to find out their payment history/patterns.  You may even want to run a business credit check.

6)  Deposit without delay – Make an arrangement with your bank to have funds available from deposited checks within 0-2 business days.  If you receive checks from customers nationwide, you could research the possible added value of a ‘drop box.’ Discuss this with your bank.

7)  If possible, request payment (in part or full) up front, prior to filling the order.  This also cuts down on time and money spent on collections.

8)  Check back here later in the week to read my post on small business collections.