If your small business offers credit to customers, then you should have policies in place to cover how and when to deal with collections issues as they arise. Not all small businesses allow customers to pay on credit, but if you’re using invoices or purchase orders, pay attention. In this post, we’ll chat about:

• How to create a collection policy
• How to know when it’s time to send a collection matter to a third party

How to Create a Collection Policy

There are a few major items that should always be included in your collection policy. First you’ll need to determine the acceptable time period for invoices to be paid. Then, work to create a mechanism for how past due accounts will be flagged for collection follow‐up. This can be based on days past due, lack of communication from the debtor, or other collection criteria.

Next, determine how to follow‐up with these accounts. This includes a policy on when, how, and how often to contact the debtor. It’s important to define how long you’ll keep trying to contact them yourself.

Once you’re ready to give up on an account, you’ll need to choose a third party agency or law firm to close the case.

Before working with a collection firm, it’s important to determine f the file is actually a viable collection file. If the debtor is out of business, for example, a better strategy might be to take a tax deduction on the unpaid invoice.

When to Send a Collection Matter to a Third Party

New clients often ask, "When should I place an account with a collection lawyer?" The general rule of thumb is after 120 days of nonpayment -- particularly if no response has been received from the debtor.

If a customer isn’t responding to collection calls and letters, it’s likely they’re unconcerned about payment or have a cash flow problem. In either case, a collection problem exists, and the account should be placed with a collection firm.

There may be times, however, when a creditor should speak with a collection agency earlier than 120 days. Here are general guidelines for when to place an account with a collection firm before the 120 day mark:

• Two or more promises of payment are broken. Payments were promised, but no checks have been received, and the customer will not send immediate payment by overnight delivery.

• The phone is disconnected. Double check with sources, and if no new listing can be obtained, send the matter to a collection agency.

• Repeated requests for documentation that’s already been supplied. This common practice is used to delay payment of the account.

• The customer won’t agree to your terms of sale. Explain your terms of sale and request immediate payment. You should take action if f they refuse or fail to send a check but agree to pay on their terms only.

• The customer indicates an inability to pay. This is an indication of a serious cash flow problem and immediate steps should be taken to protect your interests.

• The customer states they will 'take care of the account,' but refuses to make a realistic commitment or to work out a payment schedule. This is another indication of a serious cash flow problem.

• Your customer suddenly indicates a dispute regarding the product or service provided. If the claim wasn’t raised previously and your investigation shows the dispute is groundless.

Be Smart About Collections

The idea of not getting paid isn’t the most cheerful part of being in business, but it’s an unfortunate possibility that you need to plan for. Healthy cash flow is vital to a young business, and it can be negatively impacted by unpaid invoices. If you’re extending credit or using invoices, your business should have explicit credit and collection policies for how to address bad debts.