Debt collection is a tricky business for companies of all shapes and sizes, but the process is particularly vital to small and medium sized enterprises (SMEs), which often don’t have the cash flow to absorb losses as easily as larger organisations. Even so, many organisations fail to understand the small business debt collection laws that apply to them in the event of an unpaid invoice, and as a result are forced to deal with the negative consequences.
To avoid this, it’s critical for SMEs to understand how debt collection works, and when to escalate the process to a collection agency.
How is debt collection different for SMEs?
The most obvious difference between small and large organisations is the importance of individual debts. Within a corporate environment, single debts from individual debtor often aren’t the main focus of a debt recovery strategy, as it’s more important to focus on the larger debts that might arise – for example as the result of particular client going bankrupt.
Small business debt recovery, on the other hand, often deals with amounts of money that aren’t as excessive, but are no less vital to the smooth running and consistent cash flow of a company. A single unpaid invoice can have serious ramifications if not dealt with accordingly, so it’s vital for small business owners to understand the tools they have at their disposal for debt recovery, and the importance of acting quickly.
It’s also critical for business owners to understand where to turn to for advice – namely a trusted law firm or debt collection agency – and when it’s eventually appropriate to escalate the matter to the small claims court.
Debt collection process for small businesses
In general, collecting an unpaid debt starts with the creditor contacting the debtor directly, either by phone or email, in order to remind them of their obligations. The longer you leave this, the less likely it is that the debt will be honoured. It’s also a good idea to set out very clear payment terms on your invoices, in order to eliminate the potential for confusion as to when the payment is due.
If your initial attempts to secure payment for an outstanding invoice are unsuccessful, your next move should be to seek assistance from a lawyer. They’ll be able to help you draft up a letter of demand, which is a more formal form of contact outlining exactly what’s owed, and setting out a timeframe for payment. If this period elapses, and the debt remains unpaid, you’ll then need to turn to more serious measures, with the most common being to either hire a debt collector or go through the small claims court.
The best path to take will depend on your specific situation, but in general, legal action is necessary when the debt is particularly difficult to collect. For example, the debtor may be unable to pay, making collection impossible. Alternatively, they could be disputing the amount owed, in which case legal action will be required in order to arrive at a fair resolution.
Avoid debt with Trade Credit Insurance
While there are process in place to recover unpaid invoices, it’s always better to avoid debt in the first place. That’s where Trade Credit Insurance (TCI) can come in handy. TCI provides indemnification of unpaid debts, as well as access to market knowledge and credit expertise. As a result your small business won’t just be protected in the event of an unpaid invoice, but able to avoid them in the first place through a better understanding of the risk associated with your clients.
To find out more about TCI and how it can benefit you, contact Coface today.