Biggest obstacles small businesses face during debt recovery

In this article, we will be looking at the biggest obstacles small businesses face during debt recovery

Many small businesses struggle with bad debts and it’s a huge issue for a number of businesses. But you do need to understand that successfully running a business is an impressive feat. The challenges or obstacles can be frequent and trying. But once you get through them, you gain valuable insights into your customers and the general business.

One of the biggest areas, that small businesses do run into a hurdle is with debt recovery. A healthy cash flow is instrumental in running a successful business, a limited cash flow will affect the business. Whereas a healthy cash flow could turn a struggling operation into a really successful one.

Lets explore the biggest obstacles that small businesses tend to run into when collecting debt.

Set Clear terms, processes and expectations.

Small businesses are known for moving very, very quickly when they open up. And the biggest issue with this is often this comes at the expense of critical or crucial small details, such as setting up that streamlined way of doing things that everyone in the organization can follow.

So you need to take time to create internal processes. You need to be able to communicate these easily with your team if you are expanding to the point where you have a team. Also you would need to build and clearly communicate your external policies, such as payment terms, cancellation policies, etc. This is to ensure that your customers know what your policies are and you can manage their expectations.

What can you do about it?

• Slow down and plan your processes.
  • You don’t need to get everything done immediately. Take it one process at a time and iron it out from start to finish.
  • What is your invoicing process? Are you going to bill every day, every week, every month? When are those invoices going to be due? So what are your payment terms? What happens once those payment terms are exceeded? What happens when you receive the payment.
    
• Get input
  • Ask a mentor they have experience and will see things that you might not have considered.
  • You could also get input from your team, again they may see something your missed. More importantly if you include your team in the process, they will be more likely to follow the process.
    
• Document your processes
  • You need to write up clear process documents for each process in your business. If you have a team make one person responsible for the creating the processes.
  • Keep the latest version of the process documents somewhere safe but easily accessible.
    
• Ensure that your terms and conditions cover your entire process.
  • Your terms and conditions contract guides the expectations, it’s what makes sure that your client knows what to expect from the business.
  • This contract needs to cover everything about your invoicing policies, payment terms, unpaid account policy, returns etc.
  • Without a clearly drafted contract, you could find yourself in a situation where clients expectations are not managed. Or unpaid accounts are not collected on.

Time Management and Resource

A very common problem when it comes to debt recovery, especially in a smaller or newer business is not having the time to follow up on debts even though you’ve got the best of intentions. It becomes very easy to put it off or procrastinate because you are too busy. Let’s also be honest, you would rather be doing anything else than chasing customers for debt recovery.

The hours and days after an account becomes overdue are critical. The longer it takes to follow up on an account the greater the chances are that you are not going to recover those funds. Remember that trying to do everything yourself is not the most productive use of your time. If you are busy seeing clients, you don’t have the time to follow up on the overdue accounts. And if you are not adequately resourced for prompt debt recovery, you need to figure out how to correct that quickly.

The worse the bad debt book becomes the harder it is going to be to collect the funds and worse your cash flow will become.

What can you do about it?

• Plan and build good habits.
  • Make sure that you take a couple of hours every week to go through the outstanding accounts, and take the necessary action that you need to get them done. Taking these small steps into consideration could also free up some time later in the day.
    
• Automatic Reminder Notices.
  • These can be used through your invoicing system, if you are using an invoicing system or a CRM, they could also be used through a debt recovery software and sent out. An alternative option, set up automatic reminders in your calendar for you to chase up on the accounts.
    
  • If you have a team, assign a dedicated person to the debt recovery process. The more people involved in the process the more diluted it becomes. But if you have a dedicated person whose sole job is to follow up on unpaid accounts. They are the one that knows each account from end to end, and can give you the answers as you need them.
    
  • Use a debt recovery software, there are many options out there. Most recovery software comes with reminder automation and can be programmed to to follow your defined unpaid management process.
    

Difficult Conversations With Debtors.

It’s uncomfortable having tricky conversations with people, especially if it’s about money, and especially if it’s not part of your everyday practice. There’s also the added worry of possibly damaging the relationship between yourself and the client, or losing rapport with customers. But lets be fair most people don’t like to have those difficult conversations.

It’s also common in small businesses that you actually just don’t have the experience in maybe conflict management, or you might not be fluid in the type of language to use. And a lot of people just have a fear of putting their foot in it when it comes to debt recovery conversations.

What can you do about it?

• Upskill someone in the team on conflict management.
  • Irrespective of what your systems you are using up skill yourself or someone on the team in conflict management, there are often courses available, they can be found online.
    
  • Conflict management skills leads to a better feeling of confidence to be able to hold that conversation to be able to negotiate a result. And more importantly, hopefully keep the relationship intact. So have a look and see if there is a way to up skill yourself or a team member in conflict management.
    
• Prepare for the conversation.
  • This is potentially the most vital part of the debt collection process. If you’re making telephonic follow ups, consider how the call would go? What are the questions or the points that might come up and plan a range of payment options before you even enter the conversation. And the big reason for this is what you want to be able to do in this conversation is be focusing on the solutions rather than the problems.
    
  • If you’re unprepared, the first curve-ball from that customer could result in you losing control of the conversation. And the moment you lose control of the conversation, the chances of getting that person to commit to or honor a payment arrangement is not going to happen.
    
• Outsource your debt collection.
  • Debt recovery agencies very definitely are experts in holding those tricky conversations. They are regularly up to date with the latest laws, the latest changes, so they are able to handle those tricky conversations. There are also some downsides to outsourcing to an agency. You may have to pay collection fees upfront, with no guarantee that the debt will be recovered. The client could feel that it was unfair to hand them over and thus the relationship is tainted.

Tracking a bad debt portfolio.

Let’s be fair we all hate debt collection and wish the ocean would just wash it away. So how do small businesses ensure that they are looking after their bad debt portfolio?

You need to be able to track you bad debts, irrespective of whether you have five clients or five hundred clients. You need to know exactly what is happening with that bad debt. Sometime the sheer scale of your client base can actually be the biggest obstacle that your faces. The more people there are to follow up on, the harder it can be to reconcile payments and keep track of the outstanding debts.

In our experience, what this results in is customers or invoice slipping through the cracks. This is because either you forgot to invoice them but more often than not it’s because you did not realize the account has fallen behind and haven’t done the follow up.

Whether you run a medical practice or a lawn mowing business, you’re going to have to effectively manage each customer on your books with care.

What can you do about it?

• Again, making one person responsible for accounts is a great way to ensure nothing is missed.
  
• Clear processes and systems.
  • These are an invaluable tool when you’re trying to tackle bad debt or debt collection at a scale. Having automated reminders within your invoicing system is a great way of helping with that. Or having a really good debt collection software that those automatic reminders are going out. The ultimate win would be as if your debt collecting software integrates into your invoicing system.
    
• Follow strict time lines
  • You have to follow very strict timelines. This includes a very clear process for following up and escalating the debt. Now, when I say very clear timelines, if your payment terms state that the account has to be paid within seven days, if that payment hasn’t come in by day seven, by day nine, that first notice should be going out to your client.
    
  • Then follow through as per your terms and conditions. Should your terms state that at 30 days, services are suspended, you have to suspend those services. If you don’t, what you’re actually doing is encouraging that customers bad behavior.
    
  • if you say to somebody I invoice every Friday, you need to make sure that on Friday, that invoice has gone out. And that’s the first sign to your client that you are serious about this. Stick to your unpaids time line, this is the next sign to your client that you are serious about the collection of the funds.

Conclusion.

So if you take one of the big obstacles off your to do list by just working with something like a debt collection software, it starts to open up other aspects of your business. That you can focus on instead of sitting spending hours chasing up unpaid accounts or having difficult conversations.

Software is going to be your most economical option to begin with. Obviously, as your business grows, maybe you want to bring a team in. Having a team managing your unpaid software is also absolutely phenomenal. But at the end of the day, the less time that you are having to spend chasing up on debt recovery. Is more time you’re spending on the vital functions of your business.

Such as your marketing, getting new clients in, looking at the financials and actually doing what it is that you went into business to do. I’ve always said it, nobody opens up a business and says, “Oh, I love admin”. I can tell you even less people open up a business and go “I love debt recovery”, nobody does. So you can limit the amount of time you are having to spend on that debt recovery process just by following these few small tips. And if those don’t work, I would then very definitely suggest get a hold of a debt collection software, or a debt collection firm that knows what they’re doing and can take that off your plate.

We did a Facebook live on this subject to watch the video click here