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Collecting on Past Due Accounts Without Ruining the Customer Relationship

Every small business owner knows that cash flow is the key to their company’s survival. Cash comes from customers, so preserving those relationships is vital to a small business. But what do you do when customers stop paying their bills? You may have extended credit and now your customer has gone silent. The invoice is well past due and they won’t respond. Clearly, there is a problem, but how do you go about working through the issues and getting paid?

When word of mouth advertising and online reviews are as critical to a company’s success these days as traditional marketing methods, you simply can’t risk a backlash that has the potential to sink your ship. Many owners fear getting tough with non-paying customers might run them off altogether and spell the end to their business. So how do you balance “the customer is king” against “pay me my money?”

A softer approach

We’ve all heard the old saying “you catch more flies with honey than vinegar,” and that couldn’t be truer in the case of customer retention. After all, customers keep coming back when products and services are provided with a smile. Maintaining your cheery disposition can be difficult when a customer either chooses or is forced to stop paying your bills. But making use of that old adage can be just the trick you need to get the checks rolling in.

In some higher-value breach of contract matters, especially where the ongoing relationship with the adversary is not a concern, it is common practice to initiate aggressive collection efforts to intimidate and scare the debtor into paying. But this tactic is almost never the right approach when working with smaller value accounts that you need to keep your business alive.

Most customers actually want to pay their debts, but they may be prevented from doing so by some temporary hardship. Acknowledging that, it is possible to use both traditional and alternative collection strategies to create a win-win situation for both of you.

Creative collections

Here are some ideas to make your company’s collection efforts more fruitful and keep the cash stream steady:

  • Clearly define your terms – Make sure you and your customer are on the same page with payment terms from the outset of your relationship. If not included on every invoice, your terms should be communicated clearly to your customers ahead of any purchases so your expectation for payment is understood going in.
  • Send invoices and reminders – Be methodical when sending invoices, account statements, and payment reminders. Forward them regularly, every 15 to 30 day after goods or services have been provided. By doing so, you subtly reinforce your payment terms each time such communication is made and keep your company’s name in mind when cash becomes available to disburse.
  • Cease providing goods and services – At some point after payment has become due, you should establish a date when further provision of goods and services will stop unless payment is made. This date should be communicated to your customer ahead of time, so there is a clear timeline of proposed action. The tone of your message should be sincere but firm, perhaps using language like “We regret that we must take this action.”
  • Reiterate expectations and show appreciation – If you have conversations with the customer, you should avoid confrontation. That’s a quick way of losing whatever sense of obligation they have for the debt at issue. Instead, try applying the “sandwich” technique, where you start with the bad news (you owe us money), then give the good news (we appreciate your business), ending with more bad news (we must have payment by the end of the month or we can’t ship more product). This is an effective way of conveying the seriousness of the matter, while making it clear that you want to continue serving the customer.
  • Tap into your empathetic side – It could just as easily be you who’s having difficulty paying the bills. Frankly, it can happen to anyone. So when you communicate with your customers about their past due account, don’t assume the worst (e.g., they’re going out of business and you’ll never get paid). Encourage them to be open and honest about the hurdles they face in paying you, and show empathy for their situation. At the very least, you’ll keep them on your side by letting them know you care about what they’re experiencing. At best, they’ll reward your compassion with a solution to their payment problem.
  • Offer alternative payment arrangements – In listening to the reasons your customer is giving for not paying their debt, you may learn something you didn’t know – such as, they just got purchased by a larger company who has put a hold on disbursements until further notice, or their biggest customer is a little late on payment to them so their cash flow is restricted. Whatever the reason, there is opportunity to propose an alternative payment arrangement to accommodate their situation. You might agree to extended terms with an added interest rate, or defer a late payment penalty to the next order, or accept small payments over a series of months. The possibilities are endless, but there is usually a way to make both sides happy if you are willing to get creative.

When all else fails…

If you’ve tried these tips and others without success, it may be time to escalate the matter. There is a difference between “slow pay” and “bad debt.” The longer a debt goes unpaid, the less likely you are to ever get paid. Over the space of a few months, your asset can turn into a liability.

Set an internal deadline for payment, past which you resolve to get outside debt collection assistance, then stick to it. Who you choose for outside debt collection is a matter of preference. Collection agencies charge as much as 50% of any amounts collected, whereas big law firms may charge as low as 30-35% but aren’t usually interested in matters under a few thousand dollars.

At TrustBridge Legal, we offer a purely contingent 20% fee arrangement for debts as low as $500 that do not require litigation. Your company pays nothing unless a recovery is made. This no-risk offer is perfect for small businesses on a budget. And we follow the same customer-retention methods mentioned in this article, because we understand that customers are your company’s lifeblood.

No customer is perfect, but late payments don’t have to mean the end of a relationship. There are simple, friendly ways to get paid for your hard work. Who said you can’t be a good guy and succeed in business?

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This article is provided for educational purposes only and is not intended to be legal, financial, or tax advice. The information provided herein was accurate at the time of publication and is subject to change without notice. We recommend that you consult an estate planning attorney or a tax advisor to discuss how current laws apply to your situation.

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