As a small business, you want to make big moves. Bigger contracts. Bigger production. Bigger dollar amounts flowing into your business. Naturally, big moves bring bigger costs. Bigger staffing requirements to keep up with production, delivery, and service. Bigger payroll to keep up with the staff. Bigger outlay of cash for the raw materials necessary to provide your product or service. Any break in the cash flow is a potential death knell for any business, and is especially hard for us little guys!
So, you’ve ordered more material, hired some extra staff (or authorized extra hours), and delivered on your promise. Now you’re holding receivables from your customers, and things look good…on paper. If your customers pay in a timely manner, things really are great! What happens, though, when a customer can’t, or won’t pay what he owes? Accounts Receivable collection is often a serious problem for a growing business, and there are different ways they choose to deal with this issue.
Accounts Receivables exist because you’ve essentially extended credit to your customers. You’ve delivered your goods or services and allow them a specific time to repay. The plus side of offering net payment terms is attracting more customers. This allows them to conserve cash on hand. On the minus side is offering such terms require taking time to establish policies on qualifying customers and defining a clear payment policy. There is also the real risk that a customer may not pay.
Accounts Receivable Financing Loans
Depending on your creditworthiness, your business may qualify for an accounts receivable financing loan. Your outstanding receivable is surety for the funds the bank or other financial institution loans. Typically, lenders only give you up to 70% of the outstanding invoice(s). You are still responsible for collecting the funds from your customer and repaying the loan, but you at least have working cash to use in operating your business.
Factoring Invoice Loans
This type of loan still uses the outstanding receivable as surety. However, instead of lending money to you, the lender essentially buys your receivable. You get a lump sum payment that represents a percentage of the outstanding amount owed you, and the bank assumes responsibility for collecting the funds from your customer. You don’t have to pay back a factoring invoice loan (making you wonder why they call it a “loan” in the first place, right?!!). One reason these loans appeal to many businesses is the lending institution bases it’s decision to purchase your receivable on the creditworthiness of your customer, not you. Thus, poor personal and business credit won’t immediately disqualify you as a candidate.
If you opt to use a collection agency, they can help in a few ways:
- Pre-Collect Notices. For a small fee, a collection agency will send a letter to each debtor, essentially saying, “We’ve got our eye on you; make arrangements to pay or we’re going to step in.” The client (debtor) then has the chance to make payment arrangements with you. If they don’t they’ve proven where they stand. It’s time to bring out the big guns.
- Full Collection Proceedings. If a client does not want to pay, you fretting over the account won’t change much. You can hand the account over for collection. The collection agency will then seek to secure payment for you. Typically, they’ll take a percentage of the amount collected, up to 50% in some cases. The agency could also sue the debtor, garnish a debtor’s wages, or use other methods (governed by the Fair Debt Collection Practices Act). As with any business decision, do your due diligence; check with the Better Business Bureau, Secretary of State, the State Attorney General, and other businesses that have used them to insure their reputation and procedures are above-board.
At LegalShieldsm, together with GoSmallBiz, we work with businesses to address issues that affect your cash flow. Our consultants can advise you on setting up policies regarding extending credit (offering net payment options), and our attorneys can generate what amount to Pre-Collect Notices, and all for a flat monthly fee rather than per item. If things escalate, then our law firms can guide you on the best steps to take next, including filing suit against clients who refuse to pay if warranted. That way, you can get back to what you do best, which is getting and keeping new customers.
Positive cash flow is the earmark of a healthy business. While we can’t prevent customers from clogging up the works, we can help clear out the pipes. Give us a call in the office at 646-340-8087 to find out how.