Collecting debts efficiently, Mr. McHugh realized, is one of the best ways for small businesses to manage the ebb and flow of cash and hang on to precious capital. It’s not unusual for businesses to borrow, often at high interest rates, or sell chunks of equity that they’d rather keep, because they’ve managed collections poorly. But most entrepreneurs would rather focus on their product, their service, their marketing, their lease, their health insurance — anything — before dealing with the gritty work of collections.
The time for an entrepreneur to think about collecting from customers is when he or she is writing the business plan, says Ms. Dunn of Plymouth, N.H. She advises businesses to establish a “credit policy” mandating that before they hand over a product to a customer who says “bill me,” they will run a credit check on the buyer. She also advises small businesses to join Equifax or some other credit bureau to be able to pull credit reports for anyone applying for credit, and also to report late payers.
Small start-ups, she says, are often so happy to have customers that they are slow to take action for nonpayment. That’s a mistake, she says. It’s best to promptly make a phone call, and follow up with a letter, so the nonpayer understands that it’s a serious matter. Any payment at all on the account — even $5 — is worthwhile, she says, because it establishes a legal record acknowledging the debt. “Once you get any kind of payment toward their balance, they have to pay the rest if you wind up in court,” she says.
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