How to Collect What Your Business is Owed and Avoid Legal Disputes
One of the first conflicts that often comes with any new business, and one conflict that is ongoing for nearly every business, is how to collect what the business is owed. A proper collections process will help you get paid more often and more quickly, and it creates a solid record to give you more leverage when you do find your business in a dispute. If you properly design your collections process, it will help ensure you get paid.
To prevent accounts receivable problems, you’ll need to understand where the problems come from. Here are general descriptions of the most common collections issues:
- You aren’t sufficiently clear in your agreement, so your customers dispute the amount owed or the date the amount is due.
- You don’t ask your customers to pay you. If you forget to invoice your customers or ask them for payment, there’s a good chance they’re going to at least pay late.
- Your invoice is unclear or inaccurate. If your customers don’t understand parts of the invoice, or if the invoice is wrong, your customers are not as likely to pay you promptly (or at all).
- Your product or service fell short of expectations. If you don’t live up to your end of the bargain, your customers are going to be less likely to pay you.
- You’re doing business with the wrong people. Sometimes you have a clear agreement, you send the invoice on time, you do good work for the customer, and you still don’t get paid.
To help avoid these issues, and help improve your collections:
Be thoughtful in creating your agreement with your customer:
Make sure you and your customer are reaching an agreement, especially about payment terms. If your customer is not clear about what is expected of you and of them, you are unlikely to get paid on time. Make the terms as plain as possible, and put them in writing so that (1) your customer can review them at a later date, and (2) you can prove the terms of the agreement, if it comes to that.
Collect money upfront. If possible, collect payment from your customers before they take your product or service. Once your customer receives your product or service, you lose leverage. And prolonging the amount of time between agreement and payment can cause you or your customer to forget the terms or otherwise become unable to pay.
Collect money asap, if not upfront. If you can’t collect payment upfront, try to collect payment shortly after you provide your service or product. You’ll be fresh in your customer’s mind and can address any issues early.
Give your customers an incentive to pay. There are a few ways to approach this: give a discount for early payment, charge interest and fees for late payment, or do both.
Get good contact information for your customers. It’s tough to collect payment from people you can’t track down.
For large transactions: vet customers, and get personal guarantees. For more valuable transactions, you may want to review a credit report or otherwise look into the customers ability to pay, and get a personal guarantee from the customer. Personal guarantees require individuals (rather than mere businesses that can close up shop) to be on the hook for the contract.
Understand, draft, and negotiate any contracts properly. Have a written agreement, and make sure you understand the agreement and draft it to clarify the terms of the particular deal. Check out the contracts section of our blog for resources about understanding, drafting, and negotiating contracts.
Make it easy on your customers to pay you on time
- Send timely and error free invoices. Don’t give your customers a good reason to withhold payment by sending invoices with errors or sending invoices that do not arrive with enough notice for your customers to send payment before the debt is past due.
- Accept as many forms of payment as you can. Offer online payment and accept credit cards. Online payment often requires the least effort for your business and your client. The downside to online payment and accepting credit cards is that merchant service companies will keep a few percent of what your client pays you. But, getting paid 95-98% of what you’re owed is much preferable to not collecting at all.
- Have consistent practices. Create an expectation for your customers, and meet that expectation. Ideally, your customers will get into a routine of paying you. It’s tough for them to get into a routine if invoice delivery, payment terms, or payment methods are constantly changing.
Keep good records:
You need to know when to send invoices and who owes you payment. Create a system for reviewing accounts receivable so you know when to send outgoing invoices and when to contact delinquent customers. This single step will generally save you time and money even if you do not end up in a dispute.
If you do have issues that require assistance or are no longer worth your effort, you can bring your organized records to a collection agency and negotiate a discounted fee for the quality of the record. Or bring the organized records to your attorney and save a lot of money on attorney fees. Plus, courts, juries, and other decision makers look favorably upon people whose records are organized.
Follow up with customers that owe you payment:
Follow up with customers that owe payment. Make sure your customers know that they owe you payment. The most effective method of reminding customers of their obligations is usually a phone call. But always follow up with something in writing.
Send receipts when you receive payment. Your customers will appreciate receipts. Receipts are helpful for their records, confirm that their obligation has been satisfied, and let the customer know that you noticed and appreciated the payment.
Mark accounts as paid. This goes hand in hand with keeping good records. Don’t ask clients for payment if they don’t owe you, or next time when they do owe you, they’ll question your records.
And deal properly with problem customers:
Don’t allow problem customers to return, or require cash upfront. Don’t be naive. A customer that doesn’t pay you the first time around is not likely to pay you the second time around. You don’t need customers that don’t recognize your value.
Use collection agencies rather than letting debts expire. Companies have a limited window to collect outstanding payments. Rather than letting customers get away with not paying you, search for a licensed collection agency and utilize it. The collection agency services will cost you a percentage of what they collect, but getting something is better than nothing.
Consult a business attorney when major issues arise. Avoid legal and technical mistakes that could prevent you from getting paid or diminish your standing to get paid. Do not rely on your collection agency for legal advice.
If you’re interested in learning more about collection practices generally or have questions about a business dispute, please comment below or contact us today.
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