Nothing’s worse than a deadbeat — a customer who won’t pay.
But you have options to get what’s due you, according to SCORE writer Meredith Wood, editor-in-chief at Fundera, an online marketplace that matches business owners with the funding providers.
- One way to get cash for your unpaid invoices is by factoring your invoices: A “factor” buys these invoices at a discount (which is usually around 70 to 85 percent of the invoice amount), and then collects the full payment from your customer. This gives you cash in hand immediately.
- File a mechanic’s lien, a special instrument for construction contractors or suppliers, where the property becomes collateral to guarantee payment. A lien doesn’t send a property off to auction, but it acts to claim the job as collateral, putting your business in a “collectable position.”
- Pay an attorney to contact the debtor, but first perform a cost-benefit analysis to make sure the lawyer’s fee isn’t more than the debt you are looking to collect.
- Only use a collection agency as a last resort. Perform due diligence on an agency and search for one who will treat your customers well. You will only pay if they collect; sometimes you end up paying 30 percent — 50 percent of the invoice.
- If it is impossible to collect, write it off. Look at how long the account has been past due. If it’s older than six months, it’s safe to say it can’t be collected. The IRS requires the direct write-off method for receivables and it can only be written off once you stop actively collecting. You only need to report an estimate of how much you don’t think you’ll collect; always use a conservative estimate.
