Debt collection is important for all businesses, but it is much more important for small businesses. A large business or corporation can better weather the ups and downs of economic cycles, because they have more financing options. A small business on the other hand may not have as many options and one bad debt can send the company into bankruptcy.
It is extremely important that small businesses have an action plan for debt collection. Without a written out plan, you are gambling with your business and its ability to stay out of bankruptcy. Many businesses could have foregone bankruptcy during the financial crisis with a proper plan of action.
How do you decide what is the proper plan of action for collecting your old accounts receivables? When is the time to start collecting and stop extending the terms? This can depend on what type of business you have, but a general rule of thumb is the earlier you start, the better your chances of collecting the debt. Take a look at the chart below to see the chances of collecting versus the age of the debt.
As you can see, the earlier you are to act, the better your chances for collecting the account. The crucial time for debt collection is at 90 days past due. The percentages drop by almost 25% and the debt becomes very hard to collect.
You should do all you can as a company to collect the debt before the 90 day mark, but make sure to turn the debt over for collections before the 90 day mark. This will allow the collection agency to do their research and act on the debt before it gets to the 6 month time period. It is very difficult to collect a debt if it goes past 6 months. Most collection agencies will not waste their time with a debt this old. It is hard for a collection agency to stay in business, because the odds of collecting are so low.
I wish you well in your small business affairs and I hope that you are able to collect all of your bad debts. If there is one thing that you take from this article, make sure you act sooner than later, your business success might depend on it.