Very few people start their home-based business because they dream of spending hours chasing down people and businesses who owe them money. Unfortunately, collecting overdue invoices is something that almost all business owners have to do at some point. No matter how good your product, your profit margins, or your business plan, a few unpaid invoices have the ability to ruin your plans. Here are four ways to prevent that from happening:
Avoid Bad Debt
The first and best way to collect on unpaid debt is to not get stuck with it in the first place. One of the most common mistakes business owners make is failing to properly assess the credit risk of new clients. This is especially true of businesses that provide services, as opposed to goods. Whether you’re sending goods or providing services, if you do so before you’ve been paid then you are granting someone credit. Simple things like looking for professionalism, double- checking information given and confirming addresses can go a long way towards making sure you are negotiating with someone reputable. If you are working with another business, a quick check with the Better Business Bureau and other review sites can help reassure you that you’re working with a company that will pay their bills.
In addition to having potential clients and customers fill out credit applications, make sure that you have complete contact information for everyone with whom you do business. This includes not just the email and phone number for the person with whom you’re working, but also contact information for company owners and the accounts payable department.
It’s also important that you make it as easy as possible for your customers to pay you. There are many digital payment options available to small and home-based businesses that there’s no reason you shouldn’t make it as easy as possible for your customers to pay you. The more restrictions you have in place regarding the type of payments you can accept or the ways you can accept them (only online, only over the phone, only in person, etc.) the less likely you are to be paid in a timely fashion.
Document and Document Some More
The first document you need is a signed contract or purchase order. The contract should specify what needs to be delivered and when, as well as payment terms. The order must come from someone authorized to create the order. If you accept orders over the phone, you can either record phone calls (with permission) or insist on a faxed or emailed order confirmation.
For smaller businesses, one of the main sources of unpaid invoices is people claiming that they never received the product, or that the service was not acceptable. Shipping can be a huge cost and you may be tempted to go the cheapest route possible when sending products to a customer. Unfortunately, going cheap may mean that you don’t have proof that your product was delivered.
For service providers, making sure you have clear definitions of what you will be doing and what constitutes acceptable service in your contract is essential. When finishing a project or sending a deliverable make sure to request confirmation of receipt. Being able to show customers or clients that they have, in fact, accepted the product or service can end many contract disputes.
Ask for Your Money
It sounds obvious, but the first step to collecting on any debt is to send an invoice promptly. Too often businesses, especially smaller businesses, don’t keep good records and forget to do simple things like invoice when money is due. The longer you wait to send your invoice, the less likely it is you’ll be paid in a timely fashion. There are many programs that can help you create professional-looking invoices.
Make sure that any contracts or agreements you have clearly state payment terms. If your terms are “net 30,” then on day 31 you should follow up with the client or customer and ask about your payment. People often feel squeamish about following up so quickly, but if you allow people to pay you late, they’ll get in the habit of doing just that. Late payment fees should be built into your contract; it encourages timely payment, offers a little restitution for financial problems you may have because a payment was late, and offers a bargaining chip if someone is not paying (i.e. if you pay me by tomorrow, I can waive the late fees). Make sure you investigate and understand any legal restrictions on late payment fees. Some states limit the amount that can be charged in late fees.
When you communicate with clients about money, make sure you do so professionally and politely. Owing someone money, and being owed money are both stressful positions to be in. The more professional you are, the less likely the situation is to become emotional. Phone calls are generally more effective than emails when it comes to getting people to discuss the situation. That being said, sometimes emails are necessary to create a paper trail. Using social media to try and shame people into paying their invoices is almost never a good idea and can sometimes cause legal problems for you.
Hire a Collection Agency
The single most effective and efficient way to collect on a seriously past due invoice is to hire a collection agency. Studies have shown that the longer a receivable is past due, the less likely you are to be able to collect on it. For example, only 74 percent of receivables that are three months past due are collected. By the time an invoice is seven months past due there is less than a 50 percent chance of getting paid.
Although sending someone to collections can seem like a drastic step, doing so can often be the best decision for your business and your client relationships. Collections can be a time- consuming process, and that’s time that could be better spent growing your business and improving your product or service. Most reputable, professional collection agencies only charge if they collect, making professional collections cost effective as well.
Too often, people who are untrained in collections become emotional and actually damage their company’s reputation. Inexperienced debt collectors may also agree to less-than-favorable repayment terms or expose themselves to legal action when trying to collect on debt. But a trained collection agency is familiar with both the legal and emotional ins and outs of collecting on unpaid bills and can do so without jeopardizing future relationships.
By creating clear contracts and payment terms, you are more likely to avoid unpaid debt. By sending invoices, and following up on those invoices in a timely manner, you are more likely to avoid long-term unpaid debt. But if you find yourself needing to collect on unpaid invoices make sure to do so professionally and politely or hire someone to do it for you.
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