small business debt
Man sitting in home office, reading letter and felling worried. With one hand holding letter and with other hes forehead

By Michael Jones

Being a small business owner and having to run the daily operations of your company is tough, but having to collect consumer debts makes your job even tougher. Collecting from customers who owe you money is one of the trickiest parts of owning a small business, it can also impact your ability to get a small business loan. Understanding what kind of customer you are collecting from will increase your chances of collection. Generally, these customers will fall into one of three categories:

  1. Customers that want to pay, but cannot financially afford to do so.
  2. Customers that try to procrastinate paying for as long as possible (often juggling multiple other payments/priorities).
  3. Customers that will do anything to not pay you.

Preventive Measures

Small businesses can implement policies and procedures to decrease the likelihood that a customer becomes delinquent. Having a sales contract before providing any goods or services can help your customer (and a court) understand what the responsibilities for paying are, when payment needs to be made by, and what the consequences are for failure to comply (e.g., late fees, interest, etc.).

It is also important to ensure that every bill or invoice you send lists the due date. The sooner you send the bill or invoice, the sooner you will get paid (at least theoretically). If the payment has become past due, sending an additional notice stating such will often remedy the situation. Remember to keep records of any contact with your delinquent customers in the case that you have to escalate to formal collection.


Many customers want to pay, but may have simply forgotten or are facing tough times. How you deal with these customers will greatly affect how your small business is viewed. Try to maintain good relations with your delinquent customers whenever possible. You might even be able to convert a formerly lukewarm customer to a lifelong one.

Finances permitting, you may decide to workout a payment plan or waive a late fee to demonstrate your impeccable customer service and willingness to come to an amicable solution. If you are successful at working out an arrangement with your delinquent customer, this can save you a potentially lengthy and expensive formal collection.

Depending on each particular case, you may also want to discontinue delivery of all goods and services that the delinquent customer receives. This can also be an area where you negotiate the amount of time that needs to pass or the amount of goods or services that will be limited until payment is made.

Collection Options

If you have failed to reach a workable solution with your delinquent customer, you essentially have three options:

  1. Collect the debt yourself
  2. Use an attorney
  3. Turn over the debt to a debt collection agency

Any of these three routes can prove to be a lengthy process, but collecting the debt yourself can save you hefty fees (collection agencies sometimes charge up to 50% of the total amount to be collected, while attorney’s fees may exceed the total amount owed). You might consider writing a demand letter that summarizes the account status, past bills/invoices, and any other past communications. Although the letter should not be directly threatening, it should reference what steps you legitimately plan on taking for nonpayment. Rocket Lawyer has a great library of documents you can reference, including templates.

Depending on the state, if the amount owed is small (less than $10,000), you might consider taking the delinquent customer to small claims court. Small claims court was designed to be a quick and inexpensive way to collect smaller debts. Most states will have a self-help section or guide on their state court websites. Here’s a great breakdown by state from Nolo.

For larger amounts, you may decide to hire an attorney to sue in civil court. Many websites out there offer attorney-matching services such as: Avvo and Rocket Lawyer. If you are successful and have obtained a civil judgment against your delinquent customer, the court may set up a payment plan or your attorney may help you take further action such as garnishing wages and/or attaching liens.

If you decide to turn over the debt to a debt collection service, it can save you a lot of headaches. Here’s a list of the top debt collection services compiled by Consumer Affairs. Some customers are scared that it will affect their credit(be sure to warn them first) and other customers do not care about their credits and still may not pay. Be aware that how the debt collection service treats your delinquent customers will often be imparted on to your business. In addition, be sure when selecting a service that they are compliant with state and federal regulations for debt collection such as the Fair Debt Collection Practices Act.

These same laws will apply to you even if you are not using a service and are collecting your own small business debts. Most are common sense:

  1. Don’t call at unreasonable hours
  2. Seizing property that you do not have legal authority to seize
  3. Intimidating the debtor through false pretenses (e.g. pretending to be a lawyer)

See this explanation of illegal debt collection practices.

Michael Jones is the director of community development at Bond Street — a company focused on making small business loans simple, transparent and fair. Bond Street provides one to three year term loans from $50,000 to $500,000 range with rates starting at 6%. You can follow Bond Street on Twitter here.