Dear Miss SmartyPants,

I started a small business almost two years ago, and it is actually doing quite well. But I have a problem that I know other businesses, large or small, share: frustration over customers who don’t pay on time. It is always the same customers that I have to remind and cajole, and sometimes I have had to wait 90 days or even longer. When a number of customers are slow payers during the same time period, it really affects my bottom line. When this happens, I sometimes don’t have the cash on hand to purchase new inventory, and my creditors will only extend so much credit. My profit margin is very close, and I often feel that I am on the verge of spinning out of control. Help! 

Living on the Edge  

Dear Living,

Most of my readers’ questions are about personal relationships so it is interesting dealing with a business relationship between a small business and its customers. The following are tips on how to collect from business advisor Paul Lawrence. 

Mr. Lawrence learned the hard way how to get debtors to pay their bills. He fell into a job shortly after college at a ”rent to own” business, working in the field to collect delinquent payments. The customers were people who didn’t have enough cash or credit to buy things like televisions, stereos, refrigerators, etc., and they had a terrible default rate. At first he thought his job would be impossible, but eventually he learned that collecting money from people is really just a form of salesmanship.

When people are asked about paying money they owe, they will probably be disagreeable. Rather than reacting confrontationally to their anger, he learned that it’s much easier – and more pleasant – to use the art of persuasion. He would start his conversation with the debtor by asking why he hadn’t paid. And he never once had someone say he didn’t pay because he’s a no-good deadbeat.

There was always a reason: maybe they’d lost their job, or had unexpected car repairs. It didn’t matter what the reason was. Because he listened sympathetically, they felt that he understood their situation. And that made it possible to calmly and rationally come up with a plan together to get the debt paid. In a later job at a high-end jewelry store, Lawrence found out that the same technique worked with white-collar debtors who had good credit and upscale lifestyles.

One extremely effective strategy that he used was to call people at their jobs. The great thing about calling someone at work is that it’s hard for them to dodge the call without divulging to their co-workers or boss that they’re in debt and someone is trying to collect from them.

Now, you should know that there are laws regarding what’s legal and what’s not legal when you’re trying to collect money. If you violate those laws, you can end up being liable for significant civil damages. I’m not a lawyer and am not dispensing legal advice here, but my understanding is that it is perfectly within your rights to call a debtor at work as long as you don’t discuss their debt with anyone else there or do anything else that could be reasonably seen as jeopardizing their job.

Certainly, there are formal steps you can take to collect money that people owe you – like taking them to small claims court or hiring a lawyer – but it is often not worth the expense and effort. However, if all it takes is a few calls or a letter, it can make sense for you to go after even relatively small debts.  Just consider the time and effort spent as a necessary part of doing business.

In the next SmartyPants, we’ll review a number of highly effective collection techniques.