A Guide to Effective In-House Debt Collection

Before handing over delinquent customer accounts to a collection agency, many small businesses make their own attempts to secure overdue payments. How successful they are largely depends on the debt collection system they have in place. Knowing how to effectively collect outstanding customer debt is an important tool that will improve your small business cash flow and help to maintain the general health of your small business.

The following is a brief guide to effective, internal debt collection:

  • Create a clear credit policy. Outline the terms and conditions for establishing credit with your company, as well as the actions that will be taken when accounts are overdue. You should make sure to make this policy available to your customers, especially when an account is overdue, so that they know clearly what to expect.
  • Assertive collection strategy. Being assertive in your collection efforts will send a clear message to your unpaid customers that you are up-to-date and in control of the situation. You can, for example, make a collection call a few days before an account’s due date, and then again a few days after the due date has passed. You should also discourage extended payments unless you have good reason to believe, based on past experience, that a customer will come through on the account.
  • Review collection process. Your collection process should change to suit current economic or market conditions. When the economy is in a downturn, make sure you protecting your business against loss. This means have stricter requirements to buy on credit (like requiring a down payment at purchase). You should also step up your collection procedures by, for example, shortening the pay period and strengthening collection tactics.
  • Keep accurate records. Make sure that you maintain clear, accurate, and up-to-date credit files and payment histories on each of your customers. You should also follow-up on any changes in payment patterns.
  • Keep up communication. As long as the lines of communication are open there is always the chance that you will reach an agreement and receive some or all of the money owed to you. While you need to be firm, it does not mean that you should be rude or disrespectful. Doing so will only backfire on you. You can try meeting your customer in person to discuss a payment schedule.
  • Know your options. You need to know what your options are if you are unable to collect the outstanding debt. You can, for example, try to find a good collection agency. This will give you piece of mind, and will allow you to quickly move the debt through your business so you can focus on other things.

You may also be able to claim part of the loss on your tax return. (Tax Code IRC 166, Reg. 1.166). You can not deduct any lost profits, nor money owed for services rendered, but you will be able to deduct the cost of the goods sold

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