The Surprising Truth About Business Debt Collection Laws
Your clients’ overdue payments are a drain on your company. Even with the Fair Debt Collection Practices Act (FDCPA), you have limited recourse. Here’s what you should know about business debt collection.
If you’re a small business, you’re familiar with cashflow issues. Overdue payments can make them worse and jeopardize your business. Surprisingly, there are no federal laws that protect you from negligent clients.
The FDCPA says “if [companies are] third-party debt collectors, they’re covered by the FDCPA. If they’re creditors collecting their own debts, they aren’t.” Specifically, you need a third party to collect your debts to apply.
As a small business, hiring a third party might not be in your budget. This is especially true if you’re short on client payments in the first place. Debt collectors can charge you 7.5% to 40% of the monies owed when they collect them.
What Are My Options for Business Debt Collection?
Why are you suffering because your clients won’t pay? If you ask a professional, this is often the cost of doing business. What’s more, how you respond will say a lot about your business value.
Not all debtor clients fall into the same category. That’s why you might not need every weapon in your legal arsenal. Let’s review some scenarios to determine the best business or legal action.
Clients That Normally Pay on Time
You’re not a stranger to being strapped for cash. Your clients aren’t either. Otherwise, great customers run into cash flow issues just as you do.
This is an opportunity for your business. Your flexibility with great clients could secure their business in the future. If you’re confident they’ll pay up, you might want to bite your lip until they come through.
You could also build small late fees into your contracts. These shouldn’t be enough to damage your relationship. They could be simple deterrents (1% monthly late fee) to let clients know you take this seriously.
Clients That Owe a Lot but Make Payments Sporadically
It’s frustrating when clients don’t seem to prioritize their payments. But appearances can be deceiving.
Clients who make sporadic payments likely have other cashflow issues. Their payments might indicate they are prioritizing your business. They are doing all they can to pay off their debt.
Is formal collection required? Likely not. When they finish paying, work with them to make payments manageable moving forward.
Clients Who Simply Don’t Want to Pay
You’ve probably had clients that ‘disappear’ after the work is done. They are negligent, unwilling to pay their debts. They might even avoid speaking to you directly.
Act quickly and do not be lenient with these clients. Take formal action. Hire a collection agency or consider litigation to collect the debts owed.
Business can be ugly. Unfortunately, managing delinquent clients falls into your hands. Show your partners and clients that you don’t take delinquency lightly, even if it means taking legal action to do so.
Manfred is On Your Side
Our legal team has more than 30 years of experience in commercial litigation. We find cost-effective solutions to help small businesses succeed. We know business debt collection is about more than money–it’s about your integrity and your livelihood.
Contact us now for a free consultation. We’ll develop a long-term solution aligned with your business success.