Managing business collections

When you're running a small business, most of your clients or customers will be wonderful, but some can be difficult. Especially when it comes to paying the bill. This can put the business owner in an awkward situation.

"In small business, relationships are very important," says David Schaefer, author of "Surefire Strategies for Growing Your Home-based Business" (Upstart Publishing, 1997). "You don't want to destroy the relationship, but you don't want to be taken advantage of either. The hard part is that when you work alone, you're both the good cop, building relationships with the customer, and the bad cop, enforcing the rules."

The best plan of action is to establish a formal process for handling all collections. If the process is applied to every customer you are more likely to make it a habit and use it instead of procrastinating until it's too late. And too late may be sooner than you think.

Almost 74 percent of receivables that are three months delinquent are paid. But after six months, payment drops to 56 percent. After a year, only 29 percent of delinquencies are collected, according to the Commercial Law League of America.

One of the easiest tools to handle collections is to get it in writing. Create a basic agreement that is automatically given to all customers when services are provided. The agreement can be personalized but should outline details of the purchase or project as well as terms of payment. Most people will sign the agreement readily. Always get something in writing -- even if it is a rush job. This is the first step to avoiding problems in the future.

Unfortunately, even with a signed agreement some customers will extend the payment period. Make it a point to call as soon as the product or service is delivered to make sure the client is satisfied. Sometimes customers withhold payment because they're unhappy with the products or services delivered. The call gives you a chance to resolve the problem quickly. It is also an opportunity to ask if customers need additional products or services and to remind them of the payment terms.

Start your collection efforts the day a payment is overdue. To encourage prompt payment, some firms offer incentives such as a 2 percent discount for payment within a specified time period. Charging interest on past-due accounts is another billing policy that should be spelled out in any written agreement or invoice. The maximum interest allowed varies by state, so make sure any terms comply with local laws.

One California business gets creative with reminder notices for overdue accounts such as this one that offers the following choices for a customer to check off on a note that comes with a prepaid envelope:

I am sending a check on _______.

Here is part of your bill to show that my heart is in the right place.

Here's the whole amount; so shut up.

If large expenses are expected for a project, bill the client for a portion of the work up front. Keep track and present an expense sheet regularly. Send bills at the agreed upon intervals and don't continue the work or delivery if payment is not received. This is challenging, especially if you become friendly with the customer. If you allow too much leeway you may find yourself working ahead and then being unable to collect, because the client doesn't have the money.

Be sure to keep your cool. Always take the high road. Remain calm, polite and professional when following up with a slow payer and document repeated attempts to receive payment.

Slow paying customers are a fact of business life. Put in place a system that helps you handle follow-ups quickly and you will be able to keep up. Ignoring them may harm your business.