The moment you’ve always dreaded is here. A customer whom you’ve offered the courtesy of trade credit in the form of net terms (like net 30 days) is late on their payments. They’re so late in fact, that it’s time to start considering your debt collection options. This can be the worst case scenario for both the business owner and the customer and is something both parties likely want to avoid.
This dilemma can be especially troublesome for small businesses like manufacturers who depend on preserving their valuable relationships with their customers, such as sellers. Sometimes such partnerships go back many years, were difficult to obtain, and may even bear the additional weight of personal friendships. These emotional factors make the prospect of debt collection even more stressful and risky.
If you feel you have no choice but to pursue debt collections, then you should arm yourself with the proper knowledge about the collections process. Debt collection is something to take very seriously. A misstep during this highly-regulated process can lead to your company incurring fees or legal penalties. Before you launch into this process, consider improving your collective knowledge about collections.
Know the Laws
First things first, you should keep to the letter of the law during the debt collection process. Enter: the Fair Debt Collection Practices Act (FDCPA). Most famously, this act protects consumers from harassment from debt collectors. However, it does not technically apply its protections to business debt. Credit cards, student loans, auto loans, mortgage, medical bills, and other household debts receive protection from this act. Many businesses also choose to follow the general principles of the FDCPA if their customers fall into the small business or sole proprietor categories.
The FDCPA may not cover collection from the original creditor who a consumer owes debt to. That being said, there are certain best practices associated with the FDCPA that may be worth following. Doing so can help maintain your business reputation and some goodwill with the debtor, such as not harassing the debtor day and night regarding the debt. It’s also worth reviewing your specific state’s regulations regarding debt collections to ensure you’re not breaking any laws.
Beware of the Legal Risks of Collections
If you decide to pursue collections, you can choose to outsource this task to a debt collection agency, which will cost you additional money. The FDCPA identifies collection agencies, debt buyers, and lawyers who specialize in debt collection as debt collectors. Another option would be to sell the debt, at a partial loss, to a company that purchases past-due debts and then works to collect them.
Business to business debt is generally known as commercial debt. While the FDCPA does not provide protections for commercial debt, the Commercial Collection Agency Association (CCAA) has regulations that commercial debt collection agents must abide by. To lower your risk of a debtor pursuing legal action, you may want to work with a debt collection agent who is a certified member of CCAA. Members have to abide by certain ethical standards which can provide peace of mind.
Avoid Offering Terms to High Risk Customers
One way to protect your business from facing collection processes in the future is to be more conservative or smarter when offering net terms to customers, especially new ones. Understand that providing net terms essentially turns your Accounts Receivable department into a finance company. A first step of financing is to determine the creditworthiness of your customer. Doing so can involve processing credit applications, running credit checks, or acquiring financial information and references to perform due diligence. After approving an application, your team will need to negotiate and write a credit policy. All the while, you’ll be managing customer expectations and relationships.
Consider This Before Turning Outside
If you find yourself in a position where your business needs to pursue debt collections, the costly option of hiring an outside collections agency or contractor may seem worthwhile. This may be especially true if your employees struggle to get the job done, waste valuable time and energy, and expose you to costly legal mistakes.
Besides the costs involved, turning your past due accounts over to a third-party collections agency may perhaps affect the relationship you had established with some sensitive clients, due to the cold, practical nature of a collections representative compared to you, their known business partner. You may want to think twice before giving up the personal touch.
Prior to resorting to collections, some businesses consider factoring to get paid for outstanding invoices immediately. With factoring, a third-party company will purchase your outstanding invoices for a percentage of their value (typically between 10 to 20 percent, or possibly more if the invoices are past due, plus any extra fees and charges).
Of course, factoring has some serious downsides. You never get the full value of your invoices, your clients may be confused when contacted by a new company, and that may even cast into doubt the stability of your own business.
To help minimize the impact to your cash flow while waiting for customers to pay their invoices, consider turning to a Fundbox line of credit, which can allow you to draw short-term liquid cash based on the anticipated revenue from outstanding invoices.
Disclaimer: Fundbox and its affiliates do not provide financial, legal or accounting advice. This content has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for financial, legal or accounting advice. You should consult your own financial, legal or accounting advisors before engaging in any transaction.
