Debt collection for a small business can be a difficult endeavor. A smaller organization does not have the resources to invest in an expensive debt collection infrastructure. Instead, such an organization needs a set of cost-effective tools and procedures for collecting from overdue customers. Further, the situation needs to be optimized to accelerate cash flow, since cash is typically in short supply in a smaller entity. Here are several cost-effective alternatives:
- Shorten terms. Present customers with somewhat shorter payment terms, such as switching from 30 days to 20 days. If followed by customers, that can represent a significant improvement in cash flow. This approach does not work so well with larger customers, who may pay later, no matter what the stated terms may be.
- Due date emphasis. Highlight the due date on each invoice issued, using bold font and a highlighter. This draws attention to the due date, and may encourage the recipient to ensure that this date appears in their accounts payable record for the invoice.
- Prioritize. Prioritize debt collection efforts, so that far more time is spent on the largest-dollar overdue invoices. This improves the odds of collecting the bulk of the cash sooner, though it can increase the risk of incurring bad debts among the smaller receivables.
- Cost assignment. Match the cost of the collection efforts to the size of the receivable. If a receivable is small, it may be sufficient to mail a dunning letter to the customer. Conversely, if the receivable is a large one, apply more resources to it, such as calls from the company president, or using an overnight delivery service to ensure that the invoice and all supporting documentation is definitely received.
- Collection agency. When all other alternatives fail, turn each unpaid invoice over to a collection agency. Only take this step when all other in-house actions have been taken. If it is apparent that a customer is avoiding payment, then send the related invoice to a collection agency even sooner. At this point, any fee charged by the collection agency is still worthwhile, since the alternative is not to be paid at all.