Small Business Guide: How to Collect Bad Debts?


Ivan Clark 2016-02-24 16:00:00

Small businesses have to maintain a steady income in order to stay in business, especially considering that more than half of all new businesses fail within the first five years. Collecting outstanding debts can mean the difference between a small business being profitable and going under, so it is important that you increase your chances of being paid for products or services rendered. Here you will learn ow to avoid bad debts, manage overdue patients from customers, and collect outstanding debts.


[1] Implement a payment policy before you provide any goods or services. Have your customers sign a contract showing they understand what they are going to pay for, and when. All of the language in the document should be clear. Payment terms must be agreed upon by both parties.

[2] Show the due date on every bill you send. Some invoices have “payment due upon receipt” but if you don't put the date it is due, some clients might wait a month or more before paying.

[3] Bill every 15 to 30 days. The sooner you send a bill, the sooner you will get paid.

[4] Send reminder bills when a payment comes past due. Indicate on the bill the amount owed and the fact that payment is past due. Many customers have just forgotten about the bill and will pay it as soon as they are reminded.

[5] Keep a record of all contact with the debtor. Dates and times of calls, letters, and other methods of communication about the late payment will be required in case of legal action.

[6] Keep relevant contact information about each customer or company and check in with your contacts regularly.

[7] Develop a procedure for dealing with debts. Decide what you will do when payments are late. You'll probably want to send out a reminder first, then call the business or customer, try to negotiate a repayment plan, and then take it to collections or pursue legal action if it remains unpaid.


[1] Understand your debtor. Figure out why the person or business isn't paying. Most debtors are in one of three categories: they want to pay but can't because of finances, they always delay payments as long as possible because of priorities of the month, or they have already decided they aren't going to pay you at all. Once you have figured out what kind of debtor they are, you can come up with a plan that is mutually beneficial.

[2] Call the debtor about the amount owing. After you mail a bill and reminder, the next step is to contact by phone. Some basic tips are to be straight-forward, remain civil, explain that you are concerned because their payment is late, try to get a verbal agreement about when they will be making a payment, offer to follow up in a week by phone, mail, or email, and don't ever apologize for the debt that is owed to you.

[3] Call again in 15 to 30 days. Remind them the debt is still outstanding. The longer it goes unpaid, the less likely you will be paid.

[4] Discontinue all goods and services that the debtor receives.

[5] Write demand letters. These should address the outstanding account and include past invoices and references to previous communication. The language should reference harsher legal action should they ignore their bill. Include a date they must pay by to avoid further consequences.

[6] Negotiate with the debtor. This may be your only option to receive some payment for what is owed. Ask what they can pay, offer a discount, whatever is needed to receive payment depending on the situation. Your options get more expensive after this step, so if you can collect money yourself, even if it's less than the total of what is owed, it might be worth it to accept what they can pay.

[7] It may be helpful for you to get legal advice from an experienced debt collection lawyer, such as Elliot S. Birnboim, who have extensive knowledge in the field of Ontario debt collection. An experienced lawyer will be able to provide legal counsel and advice for collecting debts.

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