Unpaid dues can break a small business in a drastically short period of time. The small business owner often finds himself investing a disproportionate amount of time, manpower and other resources in following up with these debtors. In many such situations, the whole endeavor turns out to be a case of good money being thrown in after bad money.
Small business owners often lack the expertise, the time or the knowledge of law to carry out debt collection in the most efficient way and get the results they seek. These are the business owners who will find that hiring the professionals to do this time consuming task is a most viable solution. With an experienced attorney on board, the business owner can have the process of debt collection explained in layman terms and the legal limitations clearly outlined so that he has an objective picture of what to expect. Let’s start you off with a quick overview of debt collection right here.
Why debt collection is so important to your business?
Well, a small business relies on its inflow of cash far more heavily than its cash rich counterparts. For example:
- You may be depending on your cash inflows to pay your employees
- Your inflows may dictate how much inventory you have of raw materials, which impacts how much production you can carry out
- Operational costs to keep your business running and the production happening may hinge on utilities costs that can be paid only if your inflows come in as expected
- Your advertising budget and marketing activities may depend on your cash inflows
- Any maintenance of equipment or office premises may be possible only if your dues are paid on time
Yes, all businesses big and small rely on their cash inflows but a small business has little cushion when it comes to its finances. There is no huge capital accumulation here that can absorb some of the impact of unexpected financial needs, neither is there a lot of flexibility in the time that is at your disposal when you have to make payments. These limitations and the tight budget on which operations are carried out in a typical small business make it far more important for you that your debtors fulfill their payment commitments without fail.
But, the reality is that every business has some debtors who don’t make their payments as promised. This may be because of genuine reasons such as a financial loss faced by them or non- availability of a key person who needs to sign off on the payment. There are also the debtors who deliberately and willfully delay payments or avoid payments. Either way, it is absolutely essential for you to make every effort possible to recover the debt, as quickly as possible by investing the minimum of resources in the process.
The process of debt collection explained
The process of debt collection does not always start with professional collectors being called into the fray. In fact, making telephone calls to customers with overdue payments is a part of the daily tasks carried out in almost every business and most businesses have a dedicated staff member in charge of doing these follow- ups. Many of the dues may be recovered by the simple act of making a phone call to remind the customer about it. There are several advantages to this method:
- It lets you establish direct contact with the customer
- It gives you a clear, accurate picture of why the dues are not being paid
- It lets you explain your problems because of the late payment
- It gives you the flexibility to adopt different approaches with different customers, depending on their unique circumstances and challenges
The next step may be personal visits to the customer from yourself or your staff. This is an approach that may become inevitable if the customer starts avoiding your calls or you can’t seem to reach them at all or the phone has been disconnected and there is no response to other communication methods such as mails. With a personal visit:
- You get to verify that the person’s business or home address is still valid
- The pressure that mounts on the customer is greater because a personal visit attracts far more attention from the people around them than a phone call does
- A personal visit indicates that you have stepped up the process of collection and you may be gearing up to take legal action next
Often, small businesses face immense trouble getting dues collected from people or businesses that are not based in the same city or state as them. In such cases, the ability of the business owner to regularly follow up is severely limited especially if he cannot spare manpower to make personal visits to the debtor. These are cases where hiring a professional debt collector at an early stage can really make a huge difference to the business.
Who are debt collectors and what do they do?
Debt collectors are the professionals who help you recover your money from debtors who have not fulfilled their payment commitments. They are professionals who may be employed by a debt collection agency or attorneys specializing in this niche. The most significant point that you need to know about debt collectors is this: They are fully aware of all the legal aspects of a debt collection process. In fact, when you call the professionals in and have the process of debt collection explained, they will talk to you about what can be done and what cannot, under the purview of law.
This is, in fact, a very critical part of your dialogue with the professional debt collector because you want to make sure that you don’t step into the wrong side of law simply trying to get your rightfully earned money back. Keep in mind that the law protects your debtors and safeguards their rights with some stringent rules and regulations. These do not apply to all kinds of debt in the same degree and it is in your best interests to know exactly where they apply and in what manner they impact your attempts to recover your dues.
The FDCPA and how it impacts your debt collection initiatives
In this context, it is also important for you to know that debt collectors are monitored by the Federal trade Commission or FTC. This government body enforces the FDCPA or Fair Debt Collection Practices Act, which plays a very significant role in safeguarding the rights of your debtors. This makes the FDCPA a most important set of regulations for you to be fully aware of. If you have not heard of this Act, learn about it when you are getting the process of debt collection explained to you by your debt collection attorney.
The idea behind the FDCPA is to prevent or restrict collectors and creditors from using abusive or unfair practices to recover their monies. For example, you cannot threaten a debtor with physical harm if he does not pay you back within specific deadline. You cannot confiscate his property or cause damage to it, either. These laws may be evident to you but there are other limitations on what you or your debt collector can do, that may not be as obvious.
A case in point is the restriction on calling debtors between the hours of 9.00 pm and 8.00 am. There are many such limitations on what you can do and if you fail to follow these rules you could be attracting a lawsuit from the debtor. This is exactly why you need to hire a debt collector who is experienced in this field and who has complete, updated knowledge of the laws that work here. Some of the restrictions that your debt collector will be working around (thanks to the FDCPA) are as follows:
- No discussing the debtor’s dues with any third party (e.g.: their employers)
- No using threatening language in any interactions with the debtor
- No making false statements to the debtor (such as saying that they will go to prison if they don’t pay)
- No presenting any document to the debtor that is made to look like a government order or court order
- No adding new penalties or fines to the amount, that were not originally a part of the payment terms agreed upon by you and the debtor
Calling in a debt collector
Typically, you call in a debt collector when a payment is 90 days overdue. You have probably started the debt collection process at your end, way before this time rolls by, by means of making calls or sending emails or visiting the customer. The debt collector takes on the task when you have tried and failed with all the usual, reasonable methods.
Debt collectors may work in different ways. Some act as mere middle men, simply taking on the task of collecting the overdue money and on behalf of you, the business owner. The recovered sum is credited to your account and in exchange for their services, you pay the debt collector a percentage of the sum recovered. The collector gets paid only when the debt is actually recovered which means that the success of the recovery process is very critical to them. This gives them the motivation to stay on track with the recovery efforts until the debtor makes good his promise to pay.
There is another way in which debt collectors work- they buy the bad debts from you, the small business owner and when the money is recovered they get to keep it. If you have a debt that is due for a very long time, and you have spent a lot of time and money in recovering it, this may be a better option for you provided the debt collector is willing to pay a reasonable ‘price’ for it. With this scenario, you get rid of the debt completely and you are no longer concerned with whether or not the debtor finally makes the payment.
Ideally, through, you want to recover the debt in full or as much of it as possible so that you protect the money you have invested in the customer, not get rid of it.
Debt collectors may specialize in specific areas of debt (such as consumer versus commercial debt) or they may accept only certain types of debts, such as those that are over 60 days due, those that are based in the same city or those that are less than two years old etc. In fact, most debt collectors limit themselves to collecting dues only within the state because statute of limitations that is in force over these transactions varies from state to state.
Debt collectors do have a far greater success rate in recovering monies when compared to small business owners who are handling this aspect on their own. However, it is not realistic to expect even the most expert debt collector to have a 100% success rate. Some debtors may simply not have the finances or assets to make good on their commitments and with these, the debt collector’s priority shifts to recovering the maximum amount they can. With others, the collector may negotiate a deal to repay your debts over a period of time through installments or by making good the debt with some other asset they own.
The objective of the debt collector is to minimize the financial impact of the debt on the small business owner and they may explore various avenues to find the one that fulfills this objective in the most efficient way possible. There are also the debts that are simply impossible for the debt collector to recover and these are the ones that may end with a legal case being filed against the debtor. Hiring an attorney as your debt collector simplifies this part of the process as he can take care of these aspects on his own, eliminating the need for you to look for a legal professional once your debt collector fails to recover the funds.