Small Business Credit and Collections

Credit and Collections is a key function performed or supervised by the owner in a small business.  It provides more business than possible otherwise, but it also creates a significant level of financial risk.  Familiarity with the credit terms of one’s industry and the typical bad debt experience in that industry is important to know.  A bad debt experience of 1% of sales is considered a cost of doing business in some industries.

The credit, collection function should be organized with written policies and procedures concerning: credit application, checking credit, granting credit, following up credit granted and collections.  Applications should be based on industry standard forms with at least three commercial references.  Local credit agencies and possibly national agencies should be joined to provide the best possible basis for the credit granting decision.  Credit limits should be established based on the time in business, the legal form of the business entity, their credit history, financial stability based on financial reports and the volume of business.  Sole-Proprietors should be asked to sign a personal guarantee. You would start with a smaller number and based on the applicants payment history increase the limit as general economic conditions allow and their payment history justifies. Credit should be monitored regularly based on an aging of the account. 

Follow-up should begin with confirming receipt of the invoice.  Then at regular intervals +30, +60 and +90 the follow-up process should be routine and worded to reflect the seriousness of the time past due.  At an appropriate point the account should be suspended until payment is received and the account is back to within terms.  At the 90 day point a letter should go out notifying the customer that if payment is not received promptly the account will be forwarded to an attorney.

Bad checks can be filed on in the Justice of the Peace office in the State, County and Precinct where it was passed.  Checks should be marked NSF or account closed.  Stop payments have to be filed on in civil court.  Each NSF check should be accompanied with proof that it was mailed as certified in an attempt to collect the debt before it can be filed on in court.  Account closed checks can be filed without the proof of certified mail.  An affidavit must be completed, signed and notarized.  The original returned check, proof of certified mail and the affidavit must be submitted together.

These actions will not guarantee payment, but they will eliminate any surprises that could have been foreseen if due diligence was exercised.