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As you begin working with customers, you will need to make sure that you have built out a process for the best way to collect money from non-payers for your services or product. Unfortunately, some customers just won’t pay, no matter what you do. So, what do you do?

Most businesses operate on a cash accounting basis, which means you don’t have the income if you haven’t collected the money. But you have completed the work, if you’re a service business, or you delivered the product if your customer is another company. Now, you must find a way to track what is owed to you and how much is owed, so you know what is outstanding and needs to be collected.

Even if you have a very small business, you will find yourself in the position of having to collect from customers.

Your Own Due Diligence

Before you decide to take your collections to an outside company, you should have done as much as you can to collect, using your own internal processes and collections policies.

  • You should have a billing system in place to keep reminding non-payers of their obligation to pay.
  • You should have run an accounts receivable analysis, so you can see who hasn’t paid and how long the money has been outstanding.
  • Check your analysis for accounts that have been overdue for a long time. The longer the amount is overdue, the less chance you have of getting the payment.
  • Concentrate on the longest-due amounts, then the least-overdue accounts.
  • Make a list of the accounts that you haven’t heard from, even after several attempts to contact them.
  • Understand what you can and cannot do legally to interact with customers to get them to pay.

Once you’ve decided to outsource collections, there are two standard choices:

A collections agency

Small claims court

Below we will be going over the similar overlay when using a collection agency versus taking your debtor to small claims court. Our goal as you read this is to make sure that we remain as objective as possible.

First, let’s define what collection agencies and small claims are.

Collection agencies are organizations that specialize in debt collection. Most collection agencies operate as agents of creditors and collect debts for a fee or percentage of the total amount owed.

Small Claims, and in turn small claims court where they are heard, is the special court, sometimes called conciliation court, that provides expeditious, informal, and inexpensive adjudication of small claims. Every state has established a small claim or conciliation court to resolve legal disputes that don’t involve large amounts of money. You can find a list of the maximum amount that each state will hear for small claims court here

There are pros and cons to each side of the equation, which reflect the disadvantages and advantages of the opposite side.

Collection Agency

Pros:
Time of recovery is often much faster than small claimsAvoid court preparation and time
Reduced time, effort, and preparation on creditors end:

As a result:
You do not have to lose productive time preparing for the trial
You do not have to lose a day spending it in small claims court
You do not have to prepare a long list of evidence to present during your case
You are not guaranteed to pay court fees
Most collection agencies bill on a contingency. You ONLY pay if money is collected.

Cons:
Depending on contingency rates and size of the claim, a collection agency may be more expensive than pursuing small claims.
Collection efforts are no longer in your hands. Need to instill trust in your collection partner to represent your business.

Small Claims Court:

Pros:
Can save money because there is no contingency percentage to pay, if successful.
Remain in control of collection efforts

Cons:
Must go to court
No guarantee of a win in court
Process is slow and can take months to get on the court docket
Must pay for court fees
Must prepare case on your own
Lose productive time away from your business

Which to Use?

Those who consider themselves, “control-freaks,” may prefer to take matters to small claims court on their own. They do so with risk. They risk losing productive hours that could better be spent building their business, and of course, they risk losing the debt altogether. There is never any guarantees in court.

The real question you should be asked: Is your time worth more than what you would pay in a collection agency’s contingency fees?

If the answer is yes, and in almost every circumstance it indeed is, use a collection agency. They will allow you to focus on the more important things you should be focusing on such as your business and avoid losing productive hours.

On the other hand, if you are not one who easily delegate tasks, and your debt qualifies for small claims, it may be worth your while to take your debt to small claims court.

Still unsure of the next steps, click here to contact us for more information. In the meantime, keep an eye out for our next article as we cover timing and how the longer you wait to collect a debt that harder it is to get your return.

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