“Collecting from customers that can’t or won’t pay you is one of the trickiest parts of running a small business. If you’re too lenient, you could go bankrupt; if you’re too strict, you could turn away good customers who just need a little flexibility; and if you’re too aggressive, you could find yourself being sued by a federal agency or a state’s attorney general. This last mistake is being too aggressive, it could have dire consequences for your business.”
A golden rule in business is to collect money owed to you fast. Faster than you have to pay out. So it’s important to have the skills to handle the people who owe you money. So what are the best ways to collect debt without upsetting your customers? And should you go to court as a last resort?
A cautionary tale
Let’s start with a fictional case study to highlight the serious consequences of poor business practice that can lead to debt.
The owner of a new electrical contracting business felt fortunate to win a substantial tender for all the electrical work on a new housing development and promptly engaged two extra workers for the task. The property developer radiated confidence and experience, was very persuasive and drove a luxury car. After months of hard work without payment, the electrician opened the newspaper one morning to discover that the property company owed millions and had gone into receivership. His business took years to recover from the subsequent loss.
Four lessons from the experience:
- Securing the work was not ‘good fortune’. The property developer had exhausted his credit with other trades people. A new business in town was a natural target for him.
- Isolation in business is dangerous. Join your industry association or Chamber of Commerce for market news and to access networking word of mouth.
- Take steps to protect yourself if the financial exposure is substantial. Do credit checks. Get personal guarantees (it turned out that the property developer did have private wealth, but the debt was in his company’s name).
- Strict insistence on progress payments would also have limited the exposure.