How To Deal With Bad Business Debts
Companies thrive by building trusted business relationships with their
customers. Sometimes, however, small business owners find that customers
fall behind in payments for goods or services they’ve already received.
There are a number of ways to deal with this problem, according to the Iowa
Society of Certified Public Accountants, depending on each situation.
Review the age of your receivables
It is easy to miss the trends in your customers’ payment histories unless
you review the age of your accounts receivable at least once a month.
Accounting software programs can provide this information in an aging report
if the receivable was entered when the purchase was made or the service
provided to the customer. Monitoring the age of your receivables will help
in avoiding the number of customers who eventually become an uncollectible
debt.
Speak up
In some cases, the customer may be ready and able to pay, but your invoice
has simply slipped to the bottom of the stack. To maintain a healthy cash
flow, it’s a good idea to send out monthly statements detailing the status
of customers’ accounts to update them on what’s owed. If an account remains
outstanding, then it’s time to contact client personnel and let them know
you expect payment.
Consider legal action
If informal reminders don’t work, you may need to take stronger action.
First, send the client a demand letter that documents the fact that your
company has delivered goods or services and billed for them, and that the
client is now in breach of contract. The letter should say when payment is
required before further action is taken and what your next step will be–most
likely to begin legal proceedings against the client.
Depending on the sum involved, it may be possible to pursue your case in
a small claims court, which handles suits involving lower dollar amounts.
You can represent yourself, which means you save attorney fees, and the
process is generally fairly speedy. The dollar amount limits vary, so check
with your local court to see if your case qualifies.
If you are owed a substantial amount, you may have to sue the customer in
civil court. This will likely be an expensive undertaking, but the size of
the debt may justify it. You will have to document the agreement between you
and the customer and that you held up your end by delivering the promised
goods or services.
One option for avoiding a court case is mediation. The two sides present
their cases to a mediator, who helps them reach an agreement. If the
outstanding debt is the result of a dispute with a customer–over the
original agreement, say, or over the quality of the goods or services
delivered–mediation may be a good step to consider.
Another option: collection agencies
If chasing small payments is becoming time consuming, you may want to hire a
debt collection agency. These agencies take on responsibility for pursuing
customers with overdue accounts, even bringing legal action against them, if
necessary. They usually take a percentage of the amounts they collect as
payment for their services. Before hiring an agency, be sure to check their
references to learn about their reputation, their experience in your
industry, their collection methods, and their success rate.
Consult Your CPA
If you cannot collect the money you are owed, you may be able to deduct the
amount on your income tax return. Internal Revenue Service Publications 535,
Business Expense, and 550, Investment Income and Expenses, explain the
details. You may also want to report your experience to your local chamber
of commerce, the state credit bureau, or the Better Business Bureau so that
other businesses and lenders will know about your problems with this
customer.
Collecting overdue debts can be a frustrating experience for small
business owners. Your CPA can advise you on how to work with clients who are
in arrears and on how to better manage outstanding debts.
Access “Find a CPA.”
