How Does Debt Collection Work

Most of the new companies fail in their first five years. When managing a small startup company the most important thing is to stay solvent in the beginning. There will be plenty of bad debt out there, and one of the most important strategies that you will need to develop when managing a small company is the one that will enable you to collect all of the money from your debtors, since this can be the difference between your company’s profitability and net losses.

Bad Debts, and How to Avoid Them

Bad Debt is a non collectible debt that is made mostly due to debtor company being liquidated. To avoid having debtors like this you’ll need to be very careful with whom you do business. Another important thing is to always list the due date on the receipt your company is sending. Some companies decide to write notices like:“Payment due upon receipt“ while some others give 15 or 30 days net periods. No matter for which one your company prefers, you should write them on each invoice. If you don’t do that, the debit or company can neglect your invoice’s urgency and decide to pay it in 2, 3 or who knows how many more months.

Another important thing is to have contact phone of the debtor company and the person responsible for settling this debt. That’s usually the person who makes company’s financial decisions and it is very important to call them if they are late with paying their invoices.

debt collection

Turn It Over to the Professionals

When it comes to debt collecting you always have two options. One is to collect the debt by yourself, and the other which most of big companies choose is to hire a professional debt collection service. This is always a more efficient option, especially when it comes to larger debts. Depending on the agency it can take up ton 50% of the debt sum. Be sure to hand them copies of all of your previous correspondence and to send a pre-collect notice to the debtor before turning over the debt to the professional agency.


Another option is to try collecting debt by yourself. You should call the debtor company on the first day after you invoice’s due date expires. Ask them about the reasons why they didn’t fulfill their obligations, and also about their plans on how they are going to settle the debt. Give them several paying options and mention the possible interest that will be charged if they don’t want to coöperate. During these calls you need to be calm and professional. Don’t take this as a personal matter and try to not to be overly judgemental. If debtor still decides not to pay, start sending them letters and be sure to stop all the services this company receives from you. When it comes to charging interest go as high as you lawfully can. Be sure to save proof of your phone conversations and copies of your written communication, it will be very useful if you and end up in court.

collect debts

Court Hearings

This can be a huge drag, but sometimes it is the only way to collect the money. For debts under $5,000 you need to take the debtor to the small claims court. Be sure to collect all the paper work before the scheduled hearing. Your case can be also solved by mediation. If there is a dispute over the amount of money in question, professional mediator will try to settle it. Costs of professional mediator are usually split between two parties. If your debtor agrees, you can also take your debt dispute to arbitration in which case, the arbitrator’s word will be final.

Best way to stay solvent is to avoid bad debts, if by any chance your debtors miss paying their bills, be calm and try to settle this dispute professionally, because any other way will cost you more than the  initial debt.

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