How to Collect Money From Customers

Many businesses have at least a few customers or clients who—for various reasons—do not pay their bills. There are, however, steps you can take to improve your chances of collecting the money you're owed.

State Your Billing Policies Up Front

While there will be some variation depending on what kind of business you have (professional office, service-based business, web-based business, wholesale business), there is generally an appropriate and effective way to present customers or clients with your billing policies.

If you have a professional or consulting office, the use of a retention letter is a common practice. The letter should state how many days a client has to pay a bill and if there are any interest or finance charges for late payments. The client should sign a copy of the letter to acknowledge that he or she understands and accepts the terms. If you have another type of business, such as wholesale or manufacturing, you still can and should prepare a document for your customers that lays out the same basic information about when bills are due and what charges will be added if they go unpaid.

If you have a web-based business, or otherwise use a website to provide significant details about your business, it is highly advisable to devote a page on the site to your billing policies.

Billing Smart

It makes it easier for you to expect responsible payment behavior from your customers if you engage in responsible billing behavior. Smart, responsible billing practices include:

• Billing promptly. Unless you have a specific arrangement where, for example, you bill on a calendar-monthly basis, get your bills out as soon as possible after work is completed or goods are delivered.
• Billing clearly. Make sure the customer knows exactly what the bill is for and who to contact if there's a question.
• Billing "proactively." State on the bill (or on a cover letter) that the customer should contact you if there are any problems.
• Billing with payment incentives. Charging interest on overdue bills, and, perhaps, providing early-payment discounts, often encourages customers or clients to pay your bills first.
• Being prompt and clear with past due notices.

Beyond the latter points, it's smart billing policy to keep copies of customers' past payment checks and copies of all customer correspondence. The checks show where customers may have bank accounts, which can become important if you need to go through a formal collection process. Similarly, customer correspondence may provide information, or at least hints, about a non-paying customer's whereabouts or even employment situation, which also can be crucial information in a collection case.

Initial Collections Activities

If a customer is not responding to your bills, you will likely have to look at taking other steps to collect what you're owed. Understand that this can be a frustrating process, one in which, with each new step, you may have to review the circumstances and decide how much further you want to pursue the customer.

The federal Fair Debt Collection Practices Act (FDCPA) regulates the behavior of debt collection agencies but does not apply to businesses trying to collect their own debts. However, states often have their own laws placing some limitations on what your business can do to collect on a debt. For example, lies, threats, abuse, and harassment are generally off-limits. If you're doing your own collection work, you should consult the relevant laws in your state.

The collection process usually starts with making phone calls and sending collection letters. With phone calls, it's important to avoid harassment. You should avoid making a lot of phone calls, or calls at odd hours (such as the middle of the night), simply to annoy or irritate. You don't want your efforts to backfire because you were overly—or even illegally—aggressive. As for collection letters, you should develop and keep on file basic templates that you can quickly customize for each particular customer.

A further possible step is to offer to settle with a non-paying customer for a discounted amount. For example, you may offer to accept 75% of the amount due if the customer pays in full, in guaranteed funds, within five days (or some other clear deadline). If it works, this may be a cheaper way to resolve a collection matter than going on to take additional steps. If you try this approach, you should strongly consider making it clear to the customer that this is a one-time-only offer. You don't want any confusion, nor do you want any additional headaches related to endless new "negotiations," if the offer doesn't lead to the expected payment. Making the offer should not affect your rights to payment in full via a collection suit in court.

Small Claims Court and Other Final Options

In the end, you are left with a few basic options. Two of those options, working with a collection agency or working with a lawyer, will cost you money, and therefore will reduce the amount you could ultimately collect from the debtor. Also, a collection agency will clearly be constrained by the FDCPA. However, these options may be worthwhile if you simply don't have the time to handle the matter yourself, and you are prepared to accept substantially less than the original bill amount to resolve the dispute.

Compared to other options, representing yourself in small claims court has several advantages. First, you don't have to pay someone else. Collection agencies often keep as much as half of whatever they manage to collect for you. Second, in many cases, the defendant (the person who owes you money) doesn't show up for the hearing; often this is because the person knows the money is owed and doesn't want to have to try to present any sort of defense. This fact means that you will have some chance of simply getting a default judgment in your favor. Third, because a judgment against a debtor can have a negative effect on his or her credit rating, simply filing a court claim can be an incentive for some debtors to settle with you.

However, be aware that you'll need solid evidence that the person you are suing owes you the money. While some debtors believe they have no valid defenses and will not fight a small claims suit, others strongly believe that they are justified in not paying. If you don't think that you have a strong case, or if you think that the debtor is likely to fight, you should temper your optimism about your chances in a small claims suit—the result might be a judgment for much less than the original bill amount, or, in a very weak case, possibly even an outright judgment in favor of the defendant.

You should also keep in mind that winning a court judgment doesn't end the matter. You will still have to go through the garnishment process—locating and taking assets from the debtor to pay your bill. Finding out if and where a debtor works, and if and where he or she has bank accounts, as well as filing the necessary paperwork to garnish those wages and bank account funds, can be time-consuming.

More Information

Nolo has a variety of other articles on credit and collection, including such matters as creditor and debt collection lawsuits and debt collectors and collection agencies. There are also various federal and state government websites that are worth reviewing; just one example is the FTC's FAQ page on debt collection for consumers. For broader coverage in a single book, Legal Guide for Starting & Running a Small Business, by Fred Steingold (Nolo) contains an extended section on credit and collection issues.