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How to Collect Bad Debt

With many small businesses walking a tightrope between solvency and failure, the difference between these two states often comes down to prompt collection of accounts receivable. If a significant portion of a small business’ revenue is tied up in bad debt that could be all it takes to cause the business to fail. Small wonder then that so much attention is given to the collection of debts and the strategies attendant upon them.

Strategies for Debt Collectionhow to collect commercial debt

Do everything possible to avoid the situation where an account receivable becomes bad debt in the first place. This should include clearly marking every bill with a due date, so that some generalization does not give the debtor the idea that the bill can be paid ‘sometime soon’. A definite date maintains focus on a deadline.

Maintain a contact in the debtor’s organization so you have some person that you can talk with about the overdue account. Don’t wait a month at a time before sending reminder bills – send them every 15 days and call your contact person about them. Most importantly, be sure to have a formalized company policy on overdue accounts, so that anyone in your company who speaks with the debtor repeats the same policy.

If the account does lapse into a significant period of time and is still unpaid, you need to take more serious measures.

  • Contact the debtor by phone and continue to call every 15 days. Make it clear that you are not harassing the person, only attempting to collect a debt. Never let it become personal.
  • If you have provided a service to the debtor, stop that service at the time when it is legally permissible to do so.
  • Be sure to keep a log of the various contacts with the debtor, should the situation escalate to legal action against them.
  • Try sending letters of demand, which reference prior attempts at collection, and convey the idea that harsher action may be coming.
  • If it begins to appear that collecting the debt is almost hopeless, you may want to consider negotiating a discount on the amount owed. While this is a business loss, it would be better than a complete write-off.
  • If it is economically advantageous, take the debtor to small claims court and attempt to recover the debt.
  • If all else fails, turn the debt over to a professional debt collection service.