Debt Collection Process for Your Small Business

Expert Advice on the Debt Collection Process for Small Businesses

Small businesses are affected by debt just as much as any company of any size. There are many reasons why a small business might be owed money. For example, they could have unpaid invoices from their clients. Or, a client could be disputing work that they are claiming is incomplete.

For smaller businesses, this may represent a significant financial blow, as non-payments interrupt the normal cash flow.

Regardless of the case, it is critical to resolve the matter as soon as possible. This is something that small business owners know well, but many will be unaware of the best ways to collect debt.

Federal Management is the UK’s leading commercial debt collection agency. Since our opening in 2004, we have helped thousands of businesses recover millions of pounds worth of unpaid debt.

We help businesses of every size on a daily basis and have a wealth of experience in every sector. We asked our experts for their thoughts on the best debt collection process for small businesses.

Create a Debt Collection Process for Your Small Business

Facing the prospect of collecting money you’re owed should always require careful consideration. The choice that you make is important, as choosing poorly can result in unforeseen consequences.

There are various professional solutions that can be used, such as hiring a debt collection agency or taking legal action in a country court. In some cases, a small business might not have the capacity and resources to perform these tasks themselves, and so a professional solution should be used.

In some cases, there may be certain steps that a small business could do in-house. Whilst this is an option, it is important to consider that this will come at a cost. If you try to perform debt recovery in-house, your time will be taken away from value-based tasks as your attention will be needed for the task at hand.

We will discuss essential aspects of small business debt collection tips, such as improving invoicing practices, leveraging technology, following up on late payments, and negotiating with debtors.

Furthermore, we will examine the benefits of partnering with professional debt collectors like Federal Management, who can offer unparalleled support and expertise in the field of B2B debt collection.

Our debt collection tips are of real value to any SME owner. As a small business owner, maintaining consistent cash flow and financial stability is fundamental to your company’s growth and success, making effective debt collection a vital aspect of your daily operations.

Here are some methods for creating an effective debt collection process for your small business.

Establishing Efficient Invoicing Practices

Creating a clear and efficient invoicing process from the outset is crucial for small businesses to facilitate timely payments and minimise instances of late or missing payments. Consider these invoicing tips for a smoother experience when faced with clients not paying invoice:

• Set Defined Payment Terms: Clearly outline your payment terms and expectations, including due dates, accepted payment methods, and possible penalties for late payment, in every invoice you send.
• Issue Invoices Promptly: Send your invoices as soon as the service or product is delivered, ensuring that your clients are aware of their outstanding balance and payment expectations from the very beginning.
• Establish Payment Reminders: Implement a systematic process for reminding clients of upcoming or overdue payments, striking a balance between gentle prompts and assertive follow-ups.

Payment Terms

Most businesses require clients to sign off on and agree to payment terms before commencing a new agreement.

These terms normally describe the payment process and obligations the client will have. It is also the appropriate place to list any penalties or steps that will be taken should a payment be missed.

Most businesses have payment terms of 30 days, with some larger organisations having terms as long as 60 days.

If the client agrees and signs this, then you will be able to reference this at a later time should they withhold a payment. If they are hesitant or outright refuse to sign the agreement, then this may be a signal they never intended to pay you anyway.

Leveraging Technology for Streamlined Debt Collection

With an arsenal of digital tools available to small businesses, leveraging technology to improve debt collection processes can save time and resources, ultimately optimising your results. Consider the following tools and platforms:

• Accounting Software: Utilise accounting software, such as QuickBooks or Xero, to automate invoicing, payment reminders, and recording transactions, thus streamlining your debt collection process.
• Digital Payment Solutions: Offering flexible, online payment options (e.g., PayPal or Stripe) can make it more convenient for clients to settle their invoices promptly, resulting in fewer overdue payments.
• Task Management Systems: Employ task management software, like Trello or Asana, to organise your debt collection workflow, prioritising tasks and ensuring that follow-ups are undertaken in a timely manner.

Following up on Late Payments

Proactive and consistent follow-up is an essential aspect of utilising small business debt collection tips. Late or overdue payments must be addressed promptly to ensure that debts are recovered before they become unmanageable. Implement the following steps for successful follow-ups:

• Initial Phone Call: Upon identifying an overdue payment, make a polite phone call to the debtor to remind them of the outstanding amount and request prompt payment.
• Formal Letter: If phone communication is unsuccessful, send a formal demand email or letter, outlining the amount owed, payment terms, and possible consequences if payment is not made. If there is no response to a letter before action, proactive measures may be required.
• Payment Plan: Should the debtor express difficulty in making the full payment, consider negotiating a payment plan or offering alternative solutions, maintaining open communication to encourage cooperation.

Negotiating with Debtors

When dealing with overdue payments or non-cooperative clients, it is crucial to foster productive discussions and negotiations to reach resolutions. Here are some debt collection tips for successful negotiations with debtors:

• Remain Professional and Empathetic: Approach all communications with a professional tone, demonstrating empathy and understanding of the debtor’s financial circumstances, which can foster goodwill and increase the likelihood of cooperation.
• Prepare for Objections: Anticipate any debtor objections and be prepared to counter them with viable solutions, such as offering a discount for early payment or suggesting payment plans as alternatives.
• Set Firm Boundaries: While it is important to remain flexible in negotiations, establish your limits in cost and time to avoid being taken advantage of by unscrupulous clients.

Chasing the Payment

If your client has not paid, then it is time to begin the process of chasing the debt. This is most commonly done through phone calls or emails, however, it is better to send reminder letters through recorded postal delivery.

Sending a letter is the preferred method, as it allows for a paper trail to be generated. When your reminder is delivered, your debtor will need to sign for it to confirm reception.

You should allow a reasonable time for the debtor to respond or pay between sending your reminders. Sending messages too often or contacting them outside of reasonable hours may be viewed as harassment. This could land you in trouble with the authorities and even give the debtor grounds to withhold payment.

Late Payment Charges

It is common for companies to institute late payment charges for business debt. If a client misses the due date on a payment, they will need to pay a penalty fee.

This is a very effective way of ensuring that clients pay on time, and your credit control team can refer to this when chasing for payment.

When setting late payment charges, you must make it clear on all relevant documentation. For example, you must state what the charges will be (i.e. the rate of interest).

Hiring a Professional

Despite the best preventative measures, there will always be those clients who will not pay no matter what. When this happens, it is better to seek the assistance of professional debt collection services.

Spending too long chasing the debt alone can end up costing more money than a professional option.

Many solutions exist, such as county court action through the services of a debt collection solicitor. However, this option often also becomes very expensive, and many small businesses are forced to write off the debt due to the increase in costs.

Instead, instructing a professional debt collection agency is a much better option. They will provide an effective and low-cost solution, recovering the money professionally and swiftly.

Federal Management is one such agency and is regarded as the UK’s leader in commercial debt collection. For more information, speak to one of our friendly experts today.

The Benefits of Partnering with Professional Debt Collectors

If your in-house debt collection efforts have been unsuccessful, or your business lacks the bandwidth to manage these tasks effectively, partnering with Federal Management offers numerous advantages:

Expertise and Experience

As the UK’s longest-running B2B debt collection specialists, Federal Management has extensive experience recovering debts across various industries. This ensures that your case will be handled diligently and professionally.

Legal Compliance

Professional debt collectors are well-versed in relevant laws and regulations governing debt collection and can ensure that your debt recovery efforts remain compliant and avoid potential legal pitfalls.

Increased Success Rates

With specialised industry knowledge, debt collection agencies are more likely to achieve successful outcomes and recover unpaid debts, greatly benefiting your business’s financial stability.

Frequently Asked Questions

Read our answers to some frequently asked questions to better understand small business debt recovery and its processes.

What is Debt Collection for Small Businesses?

Small business debt collection is the process of recovering money owed by customers or clients. It often involves contact with a third-party collection agency, which can provide services such as skip tracing, credit reporting and negotiation with the debtor to reach an amicable agreement that is acceptable to both parties.

A successful debt collection strategy for your small business may also include legal action if necessary.

Why is a Successful Debt Collection Strategy Important?

Having an effective debt collection strategy for your small business can help reduce the amount of time and resources spent dealing with unpaid invoices. It also gives your company greater control over its cash flow, ensuring that any cash you are owed is paid as quickly as possible so that your business can continue to operate efficiently.

It also reduces the chances of bad debt accumulating, which can have a detrimental effect on your company’s bottom line.

Finally, having an effective strategy in place shows your customers that you take prompt and proper action when payments are overdue, which will improve customer relations and help maintain a positive reputation for your business.

How Can Federal Management Help My Small Business?

At Federal Management, we provide a range of effective debt collection solutions for your small business to help you minimise the time and resources spent chasing overdue payments. Our team of experienced and qualified professionals can assist with the efficient retrieval of outstanding debts while maintaining a professional approach and taking care to preserve valuable customer relationships.

Contact us today for more small business debt collection tips or for help with recovering business debts.

Posted on November 5, 2021