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The Small Business Debt Collection Process » Debt Collection » The Small Business Debt Collection Process



For a small business, accounts receivable are both a pain and a lifeline. You need the money customers or clients owe you. But you don’t want it to be a hassle.

Your first priority should be to follow the appropriate procedures and laws. But there’s more you need to know before you go deeper into the debt collection process.

Small business debt collection process

Collecting a debt as a small business starts gently and escalates as time goes by without payment. Begin as you normally would: with an invoice.


small business debt collection; business owner reviewing invoices

First, you send an invoice/bill to your customer or client. This should have a clearly stated amount owed and due date.


If the due date goes by and you haven’t received a payment, the value of the invoice becomes a debt owed to you. Penalties and fees may also apply, as outlined in your contract agreement. Now you must take extra steps to collect.

Reminder after the due date

Shortly after the due date, send a polite reminder to the delinquent customer via email or phone call. Emphasis on the “polite.” It’s possible that the invoice was simply lost or forgotten, and you don’t want to burn any bridges.

Debt collection letter

Your more casual first reminder may not have been enough. Make it more official with letters. These are called demand letters, and it’s essential that you keep copies of every demand letter you send. The letters will get more direct and firm as time goes on.

Collection agency

If the letters aren’t working, you may need outside help. Think about hiring a debt collection agency. They charge a large portion of what they collect — usually around 50% — but it’s better than getting nothing.

Small claims court

This is another option for those who don’t want to work with a collections agency. You can file a claim in your state’s small claims court to get what your customer or client owes you. This can be effective, but also expensive and time-consuming.


For large amounts of money, you can also consider filing a lawsuit. However, like filing a claim in a small claims court, a lawsuit can be expensive and time-consuming. Make sure the amount of money owed to you is worth the trouble before filing.

What to do

DO understand your customers and clients

Collecting debt is frustrating. But your customers and clients are human, too. And if you remember to treat them as such, you’re much more likely to retain a positive relationship.

Their reason for not paying an invoice could be something as simple as forgetting, or they could be dealing with financial hardship. The more compassionate you are, the easier it will be to get a payment or work out a deal.

DO follow FDCPA rules

FDCPA stands for Federal Debt Collection Practices Act. This law defines the legal line that debt collectors cannot cross.

Here are some examples:

  • You can only call between 8 a.m. and 9 p.m.
  • You can’t contact a debtor’s employer, friends, or family about the debt.
  • You can’t threaten or harass the debtor.

Read more about Federal Debt Collection Practices Act rules here.

DO know when to hire an agency

At a certain point, the resources you’re using to track down a debt will stop being worth it. This point will be different for every small business.

Keep track of how much time and money your employees spend trying to get the payment due. Is it worth the amount owed? If not, it may be time to work with a debt collection agency.

What not to do

DON’T leave accounts receivable up to individual salespeople

It’s tempting to have an everyone-for-themselves attitude, but it’s better to have one person in charge of collecting debts.

DON’T use a different business name when collecting debt

Even a slight name change – like using an acronym – can be a red flag to the FDCPA. Use your official, full business name in debt collection communications.

DON’T ignore your state debt collection laws

Some states have even stricter rules than the FDCPA. Check your local laws to ensure you’re operating within all regulations – not just the federal ones.

Before working with another business

Small businesses doing business with another business (B2B) should perform two checks before they sign any contract: a credit check and a reference check. These tell you more about the business’ debt history, and can give you warning if you may have problems collecting payment from them in the future.

Credit check

Purchase a business credit report from Dun & Bradstreet (D&B). This credit reporting agency can tell you about the potential partner or vendor’s credit history.

Reference check

Reach out to the potential partner or vendor’s bank to perform a reference check. You can learn more about how they handle accounts.

The bottom line

The bottom line when it comes to getting your bottom line is this: follow the rules and know your limits. When collecting debt yourself, it’s still important to abide by the FDCPA and your state laws. And when things get to be too much, know when to work with a third party to get at least part of what’s owed to you.

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