The economy has tanked, and even if sales are still chugging along, you're likely facing another vexing problem: Customers who pay late -- or never.
Small businesses are notoriously lax about their collections processes. Many worry about imposing strict payment policies or chasing deadbeat customers for fear they'll lose potential business. What's more, collecting money generally isn't too problematic when times are good.
But when the economy is bad, businesses that aren't savvy and aggressive about collecting payments get toppled by the domino effect of delinquent customers. Here are some strategies that collections experts say will bolster payment success in a bad economy:
Set Ground Rules
The most effective collections strategies are preventive -- steps you take before serving a customer. Businesses should have a formal, written payment-and-collections policy so customers know what's expected of them and the repercussions of not paying, says Len Sklar, a collections consultant in Redwood City, Calif.
This policy may include when payments are due -- preferably, no more than 30 days after a service or good is provided -- and how overdue bills will be handled. Sometimes larger businesses take advantage of small businesses with informal collections procedures. So laying out that you expect all your customers to pay within, say, 30 days, and explaining the consequences, offers more protection and makes it easier to communicate the problem with customers if they become delinquent. Your written policy might say, for instance, that invoices will be forwarded to a collections agency once they reach 60 days past due.
Businesses with customers that rack up large bills should consider requiring credit checks and credit references from prospective customers. They might also consider charging down payments, such as 25% or 50% of the total expected bill. Many small companies don't do this out of fear of losing customers. But that approach is counterproductive: Customers reluctant to undergo a credit check are often those least likely to pay.
"What happens is [businesses] are able to screen out customers they shouldn't be doing business with in the first place," Mr. Sklar says.
He also recommends that businesses consider offering more payment options, such as postdated checks, to make it easier for customers to pay. Of course, there are risks to allowing postdated checks -- but this can stave off the chance that customers might not pay at all.
Businesses should also keep a record of who pays the bills for each customer account and the bank and account information so they have that information if they eventually need it.
Offer Carrots, Sticks
Incentives help. If customers know they can shave 5% off their bill by paying early, they are more likely to do so. Similarly, a business is less likely to pay late if it faces a 10% penalty.
Ande DeGeer, owner of a Web-design business in Dawsonville, Ga., with roughly $40,000 in annual revenue, began charging customers a 50% down payment when she noticed payments trickling in later and later.
But there are still more than a dozen clients behind on payments, so she is now considering charging a 3% fee if they are more than 60 days late and 10% if they get beyond 90 days.
She thinks a late fee will give those late payers a little more incentive to prioritize paying her bill over another vendor's bill. "It used to be if I had one that lagged a little bit, it never concerned me," says Ms. DeGeer, 61. "Obviously, now it becomes a big worry."
Pursue Early and Often
One big mistake that businesses make is waiting too long to pursue late payers.
Research suggests that the longer you wait to collect, the less likely you ever will. Businesses should start contacting overdue customers within a few days after the original due date.
Phone calls are more effective than letters, says Michelle Dunn, a debt-collections expert in Groton, N.H. "When they're hearing from you -- even if they're not responding to you -- they're still putting your bill at the top of the pile," she says.
The first call should be a friendly reminder noting that the bill is overdue and asking for a deadline by which the payment will arrive. If a customer expresses an inability to pay in full, it can make sense to work out a payment plan. But if those payments continue to come in late, follow up with a few more phone calls -- or even stop by the customer's office if it's local.
Tell the customer you will unfortunately have to send the bill to a collection agency if you don't receive payment soon. Follow up your calls with notices by mail.
Ms. Dunn recommends using the big red-white-and-blue Priority Mail envelopes from the Postal Service for sending overdue-bill notices, since they relay urgency and garner more attention than a regular plain white envelope. "They always open that letter first," she says.
Keep to Your Word
If all your reminders don't work and a customer is 60 or 90 days overdue, it's time to offer some tough love and ship those invoices to a collection agency. You might try having the agency send "precollection" notices that threaten collections, which are cheaper than full-fledged collection procedures. But ultimately, if the debtor doesn't pay, you need to take action.
Collections agencies generally take a 30% cut of all collected sums. But at least you're getting something.
Kelly Spors covers small business for The Wall Street Journal.
