Collection Scenarios

Here are a series of scenarios illustrating how a collection process might be organized. Your actual process should be modified to reflect the time you have available for collecting, your relationship with the debtor, the patience you have with a particular debtor, your cash flow needs, etc. These scenarios are designed to speed up the typical collection process.

Scenario #1: A few customers, all of whom owe large amounts (say, more than $1,000)

Start with a telephone call to each customer once the account becomes past due. (For suggestions on collecting by telephone, see collection tips). If that doesn't work, take one of two approaches. Either pay an attorney to write a letter for you that says "I have been asked to contact you..." (it shouldn't cost you more than $50-$75) or write a letter yourself that notifies the customer that you will turn the account over to an attorney if it is not paid within the next billing cycle. If that doesn't work, turn the account over to an attorney.

While these steps sound simple, the actual execution of them never is. For example, you'll call a customer, and the customer will express shock that the bill hasn't been paid and will promise to pay it immediately. Since you believe him, you hold off on sending the letter. Billing cycles pass, and still no payment. You send out the letter, and he calls you to explain why the bill hasn't been paid. He keeps calling and putting you off. You have sympathy for him, and, before you know it, six months pass, you still haven't been paid, and the file hasn't been sent to the lawyer.

It's never easy to know when to put your foot down. When and whether you do it will depend on your relationship with your customer and how much you need his business. But don't ever forget that it's your money he has.

Scenario #2: A lot of customers, all of whom owe small amounts

The first step you take will depend upon how many past-due accounts you have. If possible, you should telephone each one of them. If there are too many customers to call, you should send a letter. You have two choices with the letter: either write it yourself or have a lawyer write it for you.

If you write it yourself, you'll have to use your best judgment about what to put in it. You don't want to waste your own time with a series of letters that don't produce any results. So you want to send a letter that gets their attention and accurately conveys your wish that they pay their bills. But, on the other hand, you don't want to alienate some of your customers with an unnecessarily threatening letter. Some of your customers need to be threatened, while others just need to be reminded.

Business Tools

Three sample letters (one a threatening letter, one a friendly reminder, and one that falls somewhere in between), are located in the Business Tools section.

You should hire a lawyer to write the letter if you believe your customers will respond more readily to a lawyer's letter than to your letter. If you decide to have a lawyer write it for you, you can save some money by just paying them to write the letter; don't hire them to represent you yet. You can probably get a lawyer to write the letter for you for about $50-$75. The letter should say something like "I've been asked to contact you...." It should not say "I've been retained by..." because that's not true. You're just paying the lawyer to write the letter; you're not hiring him or her yet.

If a letter doesn't work, you should send the files to a collection agency. If you know other small business owners, you should ask them to recommend a collection agency to you.

Scenario #3: A mixture of customers who owe small amounts and large amounts

For the customers with large amounts, follow scenario #1, above. For the customers with small amounts, follow scenario #2, above. If you have a lot of past-due accounts, you may just want to call the bigger accounts and write a letter to the smaller accounts. If possible, though, you should try to call all of them. Send the smaller accounts to a collection agency and the larger accounts to a lawyer.