3 Ways to Improve the Debt Collection Process for Your Small Business

A thriving small business is only viable if its clients pay their invoices in a timely manner as agreed upon. Unfortunately, some clients are not timely in payments and this can affect your bottom line.



Hiring a debt servicing firm before you need it can be the key to avoiding nonpayments. Most debt servicers are paid primarily via commissions on the paid debt, so you only pay when you get paid. Learn how a debt servicer can improve your business’s debt collection process.

1. Set clearly defined payment terms

Good payment and debt avoidance procedures begin as soon as an exchange of goods or services is initiated. Clear payment terms both during initial invoicing and in the event of debt collection are the first tools in your kit to avoid lengthy and costly debt accumulation. 

Most businesses use one of two main invoicing systems—cash or accrual. Cash accounting systems track money in real-time, so an invoice is not added to the business accounting until it has been paid. Payment terms with regard to how much of a payment is due and when, along with the due date for the final payment, must be clearly outlined. 

The accrual method accounts for the invoice as soon as it has been issued. Much like the cash system, clear terms must be set. These terms are especially important in accrual systems since you have already reported the income. You must also have a process defined both in-house and for the client in the event of a delinquent payment, as an invoice that isn't paid requires extra steps to report as a loss since it is already included in business income. 

2. Act promptly upon delinquencies 

Delinquency should never be ignored, even for a day. It sets a poor precedent with the client and signals to other clients that they can postpone invoice payments with impunity.

Another challenge for a small business is following through quickly on delinquencies, which can cause clients to take advantage of the slow billing process. This can lead to cash flow shortfalls, especially in accrual methods if money ends up being spent before it is fully collected.

Further, delaying debt collections on a delinquent invoice can cost your business money in the long run. The statute of limitations on debt collection varies depending on the state and territory, as well as some other factors, such as the type or amount of debt. For example, in Western Australia, the statute of limitations on collections is 6 years, as defined by the Limitation Act of 2005.

3.  Get help with legal processes

Even with good debt collection processes, there is a chance that a client will still refuse to pay what they owe. In this case, legal proceedings against the debtor may be necessary in order to collect the debt within the statute period. 

A debt collection servicer will provide expertise to keep your process effective and legal. The assistance begins before any collections are necessary, as the servicer will aid your business in developing invoicing and standard payment practices that discourage delinquency and follow all payment regulations. This can include setting up a reminder service that sends out a memo just before a payment due date, thus reducing the chances that the client overlooks an upcoming payment. 

In the event collections must commence, your servicer will promptly enact the collection protocols you have agreed upon. This includes negotiating repayment terms and issuing the legal Letter of Demand required to call the debt due. A servicer will take all legally allowed actions to collect the debt, up to and including suing for repayment. 

Contact National Collections to learn more about the available solutions for your business.