Debt collection is the practice of obtaining payment from customers for purchases that have been made on credit. Devising and maintaining an efficient and effective system for collecting on overdue accounts should be a priority from every small business. But many companies fail to give this aspect of their operations sufficient attention. "Collecting overdue accounts is, for many small business owners, the most unpleasant task of all, for two main reasons," noted the editors of Start, Run and Grow a Successful Small Business. "Because keeping track of which accounts are overdue can be very difficult, and because most people don't enjoy pressing others for money." But experts warn that if small business owners do not establish appropriate collection mechanisms, the financial vitality of the company itself can become endangered.

Most customers simply pay the amount due on their accounts upon receipt of an invoice. In some cases, however, the amount of a sale or debt exceeds a customer's ability or willingness to pay. The small business then must make a special effort to collect the money owed. In his book A Practical Guide to Credit and Collections, George O. Bancroft noted that an effective collection program "must be an integral part of the total sales process. The main objective of the collection program must be to develop customer relations and recover the company's delinquent receivables as quickly and economically as possible, while encouraging the formerly delinquent customer to patronize the company with future good business—business that is paid within the credit terms."

Experts recommend that small business owners view all but the most persistent collection problems as an opportunity to help a customer resolve a situation. In many cases, nonpayment of a credit account by a customer is due to a temporary problem—such as illness, divorce, or unexpected business losses—and a supportive approach will enable the customer to continue to patronize the small business in the future. As a result, the first attempt to collect a delinquent account should always be gentle and low-key, with an eye toward preserving the business relationship. "A friendly nudge can work better than a harsh ultimatum when persuading a customer to settle an overdue account," wrote William Atkinson in Nation's Business.

Customers that are honest and cooperative when dealing with a past-due account should be treated with patience. Ideally, they will be able to make a token payment and set up a schedule for repaying the full amount owed. Customers that seem reluctant but are not particularly uncooperative should be prodded gently at first, then treated with increasing firmness over time. In these cases, it may be necessary to make a definite plan for repayment of the debt and get collateral or other reassurance. Customers that make no effort to pay money owed or engage in efforts to actually avoid fulfilling their financial obligations may require a more aggressive stance.


Like the procedures for granting credit to customers, a small business's collection procedures should be consistent with the company's overall goals. Ideally, the collection process should follow a well-ordered progression, so that each step builds upon the last in a timely fashion. It also should be friendly and professional, offering customers an opportunity to respond in a positive manner. In order for a collections program to meet these criteria, several issues must be examined and addressed:

Establish sensible credit policies. You can minimize collection problems at the outset by establishing sensible credit limits with your customers. Factors to consider when extending lines of credit and repayment terms include the client's credit history and your own cash flow needs.

Organize the collections process. Accounts receivable is an essential part of fundamental business health, so your company should have an effective collections tracking system in place. "If you have a lot of customers buying on credit throughout the month, each with different terms, keeping track can be extraordinarily difficult," noted the editors of Start, Run and Grow a Successful Small Business. "However, there a number of software programs on the market that can greatly simplify this task." Whatever recordkeeping system you eventually choose for your business, make sure that you review and update it on a regular basis.

Determine if nonpayment occurs for legitimate reasons. In some cases, customers fail to make payments in a timely manner because of internal financial difficulties. But in other instances, nonpayment may be due to customer unhappiness with your business's performance. Sources of discontent include failure of your company to follow through on a promise (made by you, one of your salesmen, or some other representative), late or missing shipments and/or invoices, or poor quality of goods or services delivered. With this in mind, collection experts counsel businesses to approach overdue accounts with caution. Initial communications should be to determine the nature of situation. Make sure that the customer received the goods or services your company provided, as well as the invoices for those goods or services. Make certain that nonpayment is not due to a problem at your company's end or a mail delivery glitch.

Examine record of the client/customer and respond accordingly. If the business in question has a long track record of paying off its account in full and on time, it should be treated with gentle deference. In these instances, the nonpayment is likely an oversight, a problem with the mail, or some other minor problem. "If I have been paying on time for a number of years and then, one month, I'm late by two or three days, I would really resent receiving a collection call," one business owner told Nation's Business.

Determine appropriate method of contact. Debt collection efforts generally adhere to a natural progression, from paper or telephone notices of outstanding invoices to, at the opposite end of the spectrum, assignment of accounts to collections specialists. According to Start, Run and Grow a Successful Small Business, "the actual combination of approaches that you will take … will probably vary from customer to customer and will depend upon factors such as the location of your customers, your relationship to each one, and your cash flow needs."

The most common step taken when a credit account becomes overdue is to use the mail to remind the customer of its obligation. This correspondence can take the form of first past-due notices, second past-due notices, notices that further purchases will be on a cash-on-delivery (COD) basis until the balance is paid on the account, and letters informing the customer that the account has been turned over to an attorney or collection agency. These letters should be sent at specific, predetermined intervals for most ordinary delinquent accounts.

Telephone notices can also be an effective means of obtaining payment. Using the telephone can help the small business owner to gain an immediate understanding of the circumstances surrounding the customer's failure to pay. It is also an effective vehicle for making payment arrangements that will fit the needs of both parties. It is important to avoid using the telephone in such a manner that the customer feels harassed, however.

Personal visits to a customer may also be considered in certain circumstances. This option is, of course, predicated on the geographic location of customer. If the customer is located several states away or overseas, a personal visit is not feasible or cost-effective for all but the largest overdue accounts. Of course, the selection of different collection methods depends on some extent to the amount of money that is outstanding on the account. Less expensive paper procedures may be most appropriate for small sums, while more expensive personal visits may be warranted for large sums.

As a final step in the collection process, it may be necessary to assign delinquent accounts to an outside collection agency or an attorney that handles collections. Key considerations to weigh in making this decision are the amount of the overdue account and the length of time that it has remained unpaid. Most small businesses cannot afford to maintain a great deal of collections expertise in-house, so these collections professionals can take over after the small business exhausts its resources and abilities to obtain payment. Collection agencies and attorneys generally take a percentage (usually one-third of the total amount) of the debt collected as payment for their services. Even with professional help, however, some debts will inevitably be uncollectible due to bankruptcy, customers that "skip" (move without notice), or the expense required to collect them. For more information on securing a professional collection agency, contact the American Collectors Association in Minneapolis, MN.

Whatever combination of collection methods you eventually choose for your business, you will need to remain cognizant of the limitations that state and federal laws place on debt collection. For example, it is illegal to make continual phone calls, to use profane or threatening language, to threaten repossession when in fact the article cannot be repossessed, or to threaten to damage a customer's credit report or have their wages garnished. It is also illegal to discuss a customer's collection problem in public. In addition, businesses have to desist with collection efforts if the target declares bankruptcy (contact an attorney to look into your rights if this takes place). Given the thicket of legal issues that surround many aspects of collection, small business owners should consult an attorney before initiating aggressive approaches to collect on delinquent accounts.


Business analysts expect that in coming years, electronic bill presentment and payment (EBPP) will revolutionize debt collection for large and small businesses alike. In the first years of the 21st century, electronic bill payment remains the exception rather than the rule, due to enduring concerns about Internet security and privacy. But most experts believe that electronic bill collection systems will soon be dominant. According to some EBPP vendors, conversion to such systems could reduce many business's billing costs by 50 to 75 percent once electronic bill payment becomes the norm for companies and individual consumers.

CFO contributor Gary Stern noted that three EBPP methodologies are currently used by businesses to bill customers. One option is for businesses to post bills on their own home page. Another is to outsource the billing process to a consolidator that maintains its own page for posting electronic billings. The third is to secure the services of vendors who use e-mail to send bills directly to your customers. This method is favored by many, for it has an immediacy and convenience to the customer that is lacking in the former options. But Stern notes that the effectiveness of direct e-mail communication can be severely compromised by old e-mail addresses or other out-of-date information.


Atkinson, William. "A Kinder, Gentler Way to Collect." Nation's Business. March 1999.

Bancroft, George O. A Practical Guide to Credit and Collection. AMACOM, 1989.

Bond, Cecil J. Credit and Collections for Your Small Business. Liberty House, 1989.

Frischer, Carol. Collections Made Easy. CSA Publishing, 1999.

Jacksack, Susan M., ed. Start, Run and Grow a Successful Small Business. CCH Inc., 1998.

Jurinski, James John. Credit and Collections. Barron's, 1995.

Sher, David, and Martin Sher. How to Collect Debts (and Still Keep Your Customers). AMACOM, 1999.

Stern, Gary. "Digital Dunning." CFO, the Magazine for Senior Financial Executives. April 15, 2000.

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