Collecting Money in a Bad Economy

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"You totally lose your leverage once your job is completed," he says. He also suggests that businesses make it easy for customers to pay, by accepting credit and debit cards.

4. Act quickly when a customer misses a payment.

If customers do miss payments, don't wait to contact them. "If someone is just 10 days past due and you just give them a friendly call or a letter, it sets a precedent," Dunn says. Listen to a client's reason for not paying and work out a repayment plan. By making contact right away and showing that you're willing to work with the client, Dunn says, you have a better chance of getting paid before other creditors who are less diligent or less understanding.

The references on the client's credit application can help if the debtor does not respond to calls or letters. While creditors can't ask those references about the debt, you can say the customer listed the reference on a credit application and ask how to get in touch with the applicant. Often, just hearing that a creditor called a reference spurs a client into paying, according to Dunn. "They don't want you calling their work and their friends and the people they listed," she says.

5. Hire a collections agency.

If your initial efforts fail, you can turn to a collections agency, depending on the size of the debt. Many collections agencies won't take on small debts or will charge higher commissions on them. "By volume and sheer commoditization of debt, they're set up for the traditional credit-card debt of a couple thousands dollars and up," says Patrick Lunsford, senior editor of InsideARM, a Web site covering the receivables management industry. However, Lunsford says some companies are jumping in to offer automated online services for small businesses trying to collect low-balance debts.

In May, Kennesaw (Ga.) risk management firm MicroBilt launched a service to collect debts for flat fees ranging from $7 to $13. The service, called SmartTarget, uses MicroBilt's address verification databases to track down debtors and send customized letters with increasingly firm language. "A lot of small companies don't want to lose a customer, so it can be tailored to have that right tone to say: 'You owe us $200. Please pay in the next 30 days,'" says Brian Bradley, MicroBilt's executive vice-president for strategy.

The catch is that companies must subscribe to MicroBilt's existing services, which include credit reporting, records searches, and ID verification, to use the debt collection service. Subscriptions start at $30 per month. The company also offers small business owners a stick few had before: the ability to report delinquent debtors to credit bureaus. That threat, Bradley says, can compel customers to pay debts to small firms they might otherwise ignore.

6. Build a cash cushion.

While precautions can help reduce delinquent debt, businesses need to prepare for some payments simply to not materialize. Rigby says companies should accumulate cash reserves equal to three to six months of operating expenses in case they run into cash-flow problems. That's especially important for small companies that use cash-basis accounting rather than accrual-basis. Cash-basis accounting records revenue and expenses at the time money changes hands, rather than at the time the sale takes place. Under the cash method, businesses can't write off uncollectible debts on their taxes, in the way companies using the accrual method can, Rigby says. Such write-offs can soften the blow of an unpaid invoice, but small businesses often have to bear the full brunt of bad debt.

Tozzi covers small business for BusinessWeek Online.