A Beginner’s Guide to Debt Collection for Small Business Owners
Running a small business is an adventure. One day, you’re celebrating a big sale, and the next, you’re scrambling for cash to pay a large invoice. If you’ve ever felt awkward about asking for money you’re owed, don’t worry—you’re not alone! Debt collection can feel like an intimidating task, but with the right approach, you can get paid without ruining relationships.
Why Debt Collection Matters (and Why It’s Not as Scary as You Think)
Let’s be real—cash flow is the lifeblood of your business. Without it, paying suppliers, employees, and even yourself becomes a struggle. But here’s the good news: collecting payments doesn’t have to be stressful or confrontational. It’s all about setting expectations, communicating clearly, and having a solid process in place.
Step 1: Set the Ground Rules Early
The easiest way to avoid awkward conversations later is to be crystal clear from the start. Make sure your payment terms are well-defined and communicated to your customers. Here’s how:
Put it in writing – Ensure your invoices include clear payment terms (e.g., “Payment due within 14 days”).
Use contracts – For larger jobs, have an agreement that spells out payment expectations. Ensure all parties sign the contract, this step might seem obvious, but you would be surprised just how many people forget to get the customer to sign the contract,
Request deposits – This secures commitment and ensures you don’t get left high and dry. The deposit doesn't need to be too high, 10-15% of the total estimated bill will work wonders.
Step 2: Get Friendly with Automation
Chasing payments manually is time-consuming, but automation can do the heavy lifting for you. Consider using accounting software like Xero, QuickBooks, or MYOB to send reminders before the due date. Automated follow-ups make you look professional while keeping your customers accountable.
Step 3: The Art of the Follow-Up
So, the payment is late—now what? Instead of assuming the worst, start with a friendly nudge. Here’s a sample script:
Email: “Hey [Customer’s Name], just a quick reminder that Invoice #[12345] was due last week. Let me know if you need any further information to arrange payment"
If there’s still no response, follow up with a phone call. Be polite but firm:
Phone Call: “Hey [Customer’s Name], I wanted to check in on Invoice #[12345]. I understand things get busy, so I just wanted to touch base. Is there any missing information which is delaying payment?”
Step 4: Offer Solutions, Not Threats
Sometimes, customers hit financial snags. If they genuinely can’t pay in full right away, offer solutions like a payment plan. This keeps goodwill intact and increases your chances of recovering the full amount.
People tend to play within your terms if you're nicer to them. Keep that in mind when you're chasing debts.
Step 5: Know When to Escalate
If a customer continuously ignores you or makes empty promises, it may be time to take the next step:
Final notice email – A firm but professional message stating that non-payment may lead to further action. (Contact us for official document templates you can use)
Debt collection agency – If the amount is significant, outsourcing collections can save you time and stress. (like me!)
Legal action – As a last resort, small claims court may be an option for recovering debts. In order to take debt to small claims court, a collection recovery process needs to be detailed, ensure you are keeping accurate records of phone calls, emails and postal letters between yourself and the customer to make this process go smoothly.
Stay Professional, Stay Positive
Debt collection isn’t about being aggressive—it’s about being consistent, professional, and fair. The goal is to get paid and keep good business relationships intact. By setting clear expectations, following up consistently, and knowing when to escalate, you’ll have a solid system in place for managing payments.
Got questions or horror stories about chasing unpaid invoices? Share them in the comments—I’d love to hear how you handle debt collection in your business!
