If you're a small business owner, you can spend an awful lot of time in the muck of collecting, or trying to collect, bad debt. There's a good piece about this on the New York Times site today in which Jay Goltz, an owner of five businesses in Chicago, explains his experience in collections.
Goltz notes correctly that the biggest trap most small businesses fall into is extending credit when a client already has a significant balance due. You don't want to lose their business, so you let them have another $5,000. And then, surprise! They don't make any payments.
A business I know very well extended over $200,000 to a food service company, whose ethics were non-existent. The CEO had a meeting with the CFO of the debtor client and asked him how he could run up such a huge tab and then keep asking for more credit, and even discounts on top of that? The arrogant answer: "Because we can." One can only hope there is justice in the afterlife. Here are a few rules of the credit road that may save you from future headaches.
Get religion on how and when to extend credit terms. In my business, when I have a new client I insist on a credit card payment or guarantee. Sometimes people balk at this, and that's fine -- but they can't do business with me. Whether it's a corporate client or an individual, get a credit card and authorize (but do not run) the payment through your merchant account. And if you don't yet have the ability to accept credit cards, that is very easy to set up.
Have a written, strict new-account process. This may include mandatory credit checks and business references checks. Don't bring in business without discipline. Know who you are dealing with.
Maintain tight control over receivables. Someone has to be a bulldog. As soon as an account is late (past 30 days if those are your terms) they must get a phone call from your company and you must get their agreement on when the bill will be paid. On that payment due day, they get another phone call if there's no payment on your desk. Don't let go of the trouser leg.
Get to know a debt collections agency. Ask other small business owners for referrals. If you have ever been on the receiving end of their inquiries, you know it is no fun. About eight years ago I was miffed at a particular push-to-talk phone company for an overzealous cancellation fee. They said that since I had six phones for my business, I had to pay six cancellation fees, even though it was all under one account number. I was called incessantly day and night. I never paid but the delinquency stayed on my credit report for years.
But many people are like those who I have sent for collection. Even though I had offered to accept payment over time, as low as $100 a month, some clients refused and so I sent them to the wolves collection agent. And you know, it works. Reputable collections agencies know exactly what they can and can't do under the law. They earn their 20 percent commission. As an added incentive, you might point out to your debtors that paying their debt to you before December 31 will enable them to take the expense reduction as a tax write-off.