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Streamlining and Managing Your Collection Activities

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The tactics you will use to collect past-due accounts will vary, depending upon several factors, such as your relationship with the customer and the reason for nonpayment.

If you're going to spend any of your own time collecting past-due accounts, you should make the time count. As anyone who has ever collected debts will tell you, debt collecting can involve a lot of wasted time. The key will be to minimize your wasted time so you can maximize your results.

The tactics that you will use to collect past-due accounts will vary, depending upon several factors such as your relationship with the customer and the reason for nonpayment.

Conventional wisdom holds that you start your debt collecting with a letter gently reminding the customer that the account is past due. That letter is followed up with still more letters, each one becoming a little more persuasive than the previous one. After the sixth or seventh letter, you've threatened them with collection agencies, lawyers and lawsuits. Sometimes it works, but most often it doesn't.

The problem with this approach is akin to the problem faced by the little boy who cried wolf once too often, and it illustrates a debt-collecting truism: A letter is not a particularly effective collection technique. Most people know how the game is played. They know that if they receive the gentle reminder, they still have a few letters to go before they have to get serious about paying the debt.


If you want to start with a letter, consider paying an attorney to write one for you. You can probably expect to pay $100 or less, unless the situation is complex and it takes time to explain it to the attorney. 

The letter should say something like "I've been asked to contact you...." It cannot say "I've been retained by..." because that's not true. You're just paying the lawyer to write the letter; you're not hiring him or her—at least not yet. However, the attorney's letterhead serves to show the debtor that you are serious.

Letters are the least effective technique because they can be so easily ignored and you have a relatively limited opportunity to exchange information with your customer. If letters are the least effective method, then personal visits are the most effective. Telephone calls fall somewhere in between.

The actual combination of approaches that you will take—letter/phone call/visit, lawyer/collection agent/yourself, etc.—will probably vary from customer to customer and will depend upon factors such as the location of your customers, your relationship to your customers, and your business needs.

Factors Affecting Your Technique

Although there are general guidelines you can follow in collecting past-due accounts, you will need to modify those guidelines to fit your particular needs. Here's a look at the most important factors you'll need to consider when modifying the general guidelines.

Considering Your Relationship to the Debtor

If you decide to collect your past-due accounts aggressively, such as by having a lawyer write a letter for you as soon as the account is past due, you may have to take a less aggressive approach for certain customers. You may have to ease up, for example, on personal friends, customers with whom you work especially closely, or particularly important clients. If you have a single customer who provides, say, 80 percent of your business, it hardly makes good business sense to threaten him with a lawyer, especially if he can obtain what you provide elsewhere. (Of course, if that customer isn't paying any of his bills, you may have no choice.)

Reasons for Nonpayment

Your tactics should also be modified to reflect the reasons why your customer has not paid your bill. If your customer lost the bill while moving to a new office, and would pay it if he had it, you don't want to risk alienating him by threatening him with a lawyer. On the other hand, if your customer's reason is unsatisfactory ("I just didn't feel like paying it, man"), you can dispense with the niceties and become even more aggressive. These examples illustrate one of the big advantages of personal visits and telephone calls over letters. With a personal visit or a telephone call, you can more easily find out from your customer why the bill hasn't been paid.

Assessing Your Financial Situation

If your cash flow depends upon a particular customer paying his bill promptly, you may have no choice but to be aggressive right from the start, even with your most important customers. After all, what's the point of not offending your customer if his failure to pay you causes your business to go under?

Collection Tips to Increase Your Recoveries

While there's no surefire way to recover your money faster, these collection tips that may help you improve your technique:

  • Whenever possible, do your debt collecting in person. If that's not possible, do it by phone. Write a letter only if neither of the other two options are available.
  • When you contact customers, don't hand them an excuse ("Did you receive your bill?"). It's better to ask, "When was payment made?" If they tell you it hasn't been made, ask them if they intend to pay it today. If they say "no," ask them when they have scheduled it to be paid. Get a commitment from them.
  • If they haven't scheduled it, ask them if they intend to pay the bill. If they say "no," ask them why. Once you have the reason, hang up or walk away. If you continue the call or visit at this point, you may be crossing over into harassment. You can wait a day or two and call back to confirm the customer's position, but don't call or visit more than twice if they say they don't intend to pay the bill. At this point, it's time to turn to a collection agency or lawyer.
  • If you ask your customers if they intend to pay their bil, and they say "yes," you should continue the discussion. Ask them why they haven't paid it. They'll give you either a reason or an excuse. In either case, get a firm commitment from them for when they can pay you.
  • If they give you an excuse ("I can't pay you until my customer pays me"), don't respond emotionally. Use logic instead. Ask them for a definite commitment and a time frame in which you can expect to receive payment. Make sure that you agree on all the details, including when, how and where the money will be paid ("I'll deliver a check to your place of business on Monday").
  • If they give you a reason ("The goods you delivered to me were damaged"), try to remedy the condition, if it's within your control. For example, if you agree that the goods were damaged, see that the customer gets undamaged goods.
  • If they refuse to give you a commitment ("I'll put you on the list to get paid"), you'll have to review your options. In some cases, you can force a commitment by taking away their credit on future purchases. In other cases, your only two options are to turn it over to an attorney or turn it over to a collection agency. (There's actually a third option, if you're interested: bringing suit yourself.)
  • If you deal with large companies, you need to get in tune with how they pay their bills. Find out from them when the last day is for getting an invoice approved to get into this week's (or bi-week's or month's, depending upon how they pay their bills) check run. When you need to collect from them, call a couple of days before that date to make sure that they have all the documentation from you that they need.

If you do business with the government, consider taking a government-sponsored seminar on how to get paid. They're offered quarterly in all major cities.

  • If you have a problem with payment from a large company, the person you need to talk to is the one who is responsible for buying your goods or services (perhaps in the purchasing department). If you have a salesperson, ask who he or she deals with. Don't allow yourself to be sent to accounts payable. Your best leverage is to threaten to withhold your goods or services if payment is not made. While the purchaser may respond to that threat, the accounts payable person almost surely will not.

Call your customers who pay you on time and thank them for doing so. The call may solidify your relationship with them.

Common Debt Collection Scenarios

Here are a series of scenarios illustrating how a collection process might be organized. Your actual process should be modified to reflect the time you have available for collecting, your relationship with the debtor, the patience you have with a particular debtor, your cash flow needs, etc. These scenarios are designed to speed up the typical collection process.

Scenario #1: A Few Customers Who Owe Large Amounts ($1,000 or More)

Start with a telephone call to each customer once the account becomes past due. If that doesn't work, take one of two approaches. Either pay an attorney to write a letter for you that says "I have been asked to contact you..." (it shouldn't cost you more than $100) or write a letter yourself that notifies the customer that you will turn the account over to an attorney if it is not paid within the next billing cycle. If that doesn't work, turn the account over to an attorney.

While these steps sound simple, the actual execution of them never is. For example, you'll call a customer, and the customer will express shock that the bill hasn't been paid and will promise to pay it immediately. You believe him, and you hold off on sending the letter. Billing cycles pass, and still no payment. You send out the letter, and he calls you to explain why the bill hasn't been paid. He keeps calling and putting you off. You have sympathy for him, and, before you know it, six months pass, you still haven't been paid, and the file hasn't been sent to the lawyer.

It's never easy to know when to put your foot down. When and whether you do it will depend on your relationship with your customer and how much you need his business. But don't ever forget that it's your money he has.

Scenario #2: Many Customers Who Owe Small Amounts

The first step you take will depend upon how many past-due accounts you have. If possible, you should telephone each one of them. If there are too many customers to call, you should send a mass letter. You have two choices with the letter: either write it yourself or have a lawyer write it for you.

If you write it yourself, you'll have to use your best judgment about what to put in it. You don't want to waste your own time with a series of letters that don't produce any results. So you want to send a letter that gets their attention and accurately conveys your wish that they pay their bills. But, on the other hand, you don't want to alienate some of your customers with an unnecessarily threatening letter. Some of your customers need to be threatened, while others just need to be reminded.

Tools to Use

Three sample letters (one a threatening letter, one a friendly reminder, and one that falls somewhere in between), are located in the Business Tools section.

You should hire a lawyer to write the letter if you believe your customers will respond more readily to a lawyer's letter than to your letter. If you decide to have a lawyer write it for you, you can save some money by just paying them to write the letter; don't hire them to represent you yet. You can probably get a lawyer to write the letter for you for about $60-$150. The letter should say something like "I've been asked to contact you...." It should not say "I've been retained by..." because that's not true. You're just paying the lawyer to write the letter; you're not hiring him or her yet.

If a letter doesn't work, you should send the files to a collection agency. If you know other small business owners, you should ask them to recommend a collection agency to you.

Scenario #3: A Mixture of Customers Who Owe Small and Large Amounts

For the customers with large amounts, follow scenario #1, above. For the customers with small amounts, follow scenario #2, above. If you have a lot of past-due accounts, you may just want to call the bigger accounts and write a letter to the smaller accounts. If possible, though, you should try to call all of them. Send the smaller accounts to a collection agency and the larger accounts to a lawyer.

What's Involved in Bringing a Collection Suit

If you reach the point that you need to take some action on a past-due account, you can turn it over to an attorney, or you can turn it over to a collection agency. As a third alternative, you can file suit yourself—here's how:

Pursuing a Small Claims Court or Its Equivalent

The jurisdiction of those courts is limited by a dollar amount, usually anywhere from $1,500 up to $15,000, depending on jurisdiction. Kentucky and Rhode Island have a $1,500 limit, while Delaware and Georgia cap claims at $15,000. In other words, the most you can recover in any suit brought in small claims court is limited by the maximum dollar amount permitted by the state (plus the court costs you have to pay when you file your suit).

Acting Without a Lawyer

In fact, the system is set up to help nonlawyers who want to use it. For example, the rules about what you have to put in your complaint and the rules of evidence at trial are greatly relaxed.

Filing a Complaint in Small Claims Court

Go to your local state courthouse and tell the clerk that you want to file a small claims complaint. The clerk will help you fill it out. Usually, all you have to do is put in your name, your customer's name and address, the amount you're entitled to recover, and the grounds for bringing suit ("I delivered goods to the customer and he didn't pay me for it"). In some states, all you have to do is check a box to indicate the grounds for the suit. If your state law allows it, ask for interest on the debt. Once you pay the court costs (it varies, but it's usually about $50-$150, which you can recover from the customer if you win), you're done.

The sheriff will serve a copy of the complaint on the customer, who will have a certain period of time to respond (usually about two weeks). If the customer does not file an answer within the allowed time period, you can go back to the courthouse and get a default judgment against the customer. The clerk will help you. All that is involved is that the judge will ask you to swear to the truth of the statements in your complaint, and then will sign an order giving you a judgment in the amount you requested. When you go to get your judgment, you should bring any signed sales receipts or other proof of the debt with you. In most cases, the judge won't ask you to produce them, but you should have them with you just in case.

Once you have your default judgment, you should have it recorded. Ask the clerk for help. Essentially, this will involve taking a certified copy of your judgment to the property records clerk, who, for a small fee, will place your judgment on the official record. It's well worth the small fee, because you'll now have legal rights to money coming into your customer.

If, on the other hand, your customer files an answer within the allowed time period (or after the time period but before you are able to get a default judgment), the clerk will set a court date. You should bring whatever written documentation you have with you. Generally, the judge will ask you to tell your side of the story in your own words. You'll speak first, since you brought the suit. Then the judge will ask your customer to tell his or her side of the story. It's usually quite informal. You'll both be given the chance to ask each other questions. Since it's usually your word against the customer's, the written documentation is particularly important. The more documentation you have, the better off you'll be.

Consider the Legal Pitfalls of Extending Credit and the Associated Collection Activities

If the judge rules in your favor, you'll have to wait to see if your customer appeals the decision (usually around two weeks). If he or she does, and you're interested in pursuing the case, you should talk to an attorney at this point. If the customer doesn't appeal, the judgment is final, and you should follow the steps outlined above to have the judgment recorded.

If the judge rules in your customer's favor, you can either drop the matter, or file an appeal. If you want to appeal, you should discuss it with an attorney, but act quickly because you may only have about two weeks to file your appeal.

False or Misleading Representations

The Fair Debt Collection Practices Act also says that debt collectors cannot give misleading statements to the debtor. Here are some of the things you cannot do:

  • You cannot claim to be a lawyer if you aren't one.
  • You cannot say that the failure to pay the debt will land the debtor in prison.
  • You cannot threaten the debtor with any action that cannot be legally taken.
  • You cannot threaten to reveal false credit information about the creditor in order to get him to pay the debt.

Unfair Practices

The Fair Debt Collection Practices Act says that debt collectors cannot use what are called unfair tactics to collect debts. Here are some of the things you can't do:

  • You cannot try to collect an amount (such as interest) unless you are authorized by the agreement to collect it.
  • You cannot threaten to deposit a postdated check before the date on the check.
  • You cannot communicate by post card with a debtor about his debt.

Pursuing Payment by Individual Corporate Officers

The Uniform Commercial Code is a series of model laws governing commercial transactions that have been adopted in full or in part by every state except Louisiana. For the most part, you can leave the inner workings of the UCC to your lawyer. There is, however, one provision that you may want to keep in mind.

If you do business with a corporation and it writes you a check, pay particular attention to how the check is signed. If the corporate officer who signs the check signs it without reference to a title or a capacity, he or she is personally liable for the amount. In most cases, this won't matter. But if the company should go out of business or declare bankruptcy before you're paid, which can happen, you can still pursue payment from the individual.

Price Discrimination

The federal Robinson-Patman Act forbids price discrimination. Although this law shouldn't come up much, you might want to know that it exists. You're not supposed to charge different prices to different customers unless the difference is due to differences in the manufacture, sale, or delivery of the goods or services. So, the question arises: can you charge your uncle a lower price without violating the law? Of course you can, so long as you're not giving the discount for the purpose of lessening competition or creating a monopoly.

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