Bad debts are a part of business life. But a large unpaid invoice can cause your small business serious harm; in some cases, it can mean the difference between staying afloat and closing your doors.
Keep in mind it’s typical for an invoice to age 30, 60 and even 90 days. Anything beyond that length of time may indicate your customer is experiencing financial hardship or about to go bankrupt. Debts outstanding for that duration deserve your personal attention.
Here’s what you can do to try to collect your money.
Make it personal
Do whatever you can to put a human face to the debt. Explain to your customer that the money owed is important to you and your small business, that you’re not a large company with barrels of extra cash. Send a personal email instead of a past due notice. Emphasize the trust you placed in your customer when both of you agreed to do business together.
Stay calm when you discuss the situation and offer to come up with a payment plan. Be sure to keep a record of your emails and phone calls in case your customer still refuses to honour your agreement.
Hire a collection service
If the situation won't permit your personal involvement or your customer still won't pay, consider hiring professional collectors.
These experts are paid to get your money so they know which tactics work, and many cater to small businesses. Some agencies charge a fee for any funds collected on your behalf, others may buy the debt from you for cents on the dollar.
In Canada, there are strict rules in place around debt collection that are unique to each province and territory. For example, practices such as calling a debtor each day or using threatening language may be illegal in some jurisdictions. Debt collection agencies are well-versed in the law and can help your business to avoid accusations of harassment or illegal collections practices.
In some cases you’ll do everything you can and a customer still won't pay you. Consider these alternate compensation scenarios for delinquent payers:
- Come up with a repayment plan that allows you to be paid in instalments
- Get a ‘good faith’ initial payment upfront, if possible
- Instead of cash, agree to accept products for their resale value
- Agree to a bartering arrangement i.e. your customer owes you a service instead of cash
- Accept a valuable business referral as a form of payment
In the future, you can try to debt-proof your business by being proactive with your receivables. Invoice promptly and follow up before an invoice is due. When it comes to receiving timely payment
it's always better to act sooner rather than later. Although most business owners dread dealing with late invoices, the more aged a receivable becomes, the more difficult it will likely be to collect it.
Before you take action on any of the information above, we recommend consulting with a qualified business advisor that understands your unique needs and situation for your specific business and/or personal plans.