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  • Writer's pictureDavid Manes

Reducing the risk of customer nonpayment for small business owners

Unless your customer pays you in cash at the time of sale, you will probably encounter a number of situations with a high risk of nonpayment. For a small business nonpayment can seriously impact profits and cash flow.

Here are some tips to reduce the risk of nonpayment

  1. Send out bills as promptly as possible

  2. Make sure that your bills clearly identify the goods or services rendered, the dates purchased, and any other relevant information

  3. Send follow up reminders of past due notices immediately, with a big “Past Due” stamp on the cover of the notice

  4. Daily, monitor payments that are due

  5. Telephone the customer or accounts receivable department and ask what you can do to speed up the payments

  6. Have a set of demand letters ready to send when payments become overdue

  7. Consider compromising the amount owed or extending the time for payment if the customer has financial problems. If you do agree to extend time, insist on a periodic payment plan

  8. Respond promptly, in writing, if the customer disputes the amount owed. Otherwise, you can lose some rights under various credit laws.

  9. Consider stopping any future sales to the customer unless that customer pays the bill or the two of you reach a compromise. Also, consider cash payment on delivery as a condition to any new sale.

When taking such actions, be aware of some of the laws governing the collection of debts.

Truth in Lending Act

This federal law requires you to disclose credit terms to people who apply for credit with your business, including monthly finance charge, annual percentage interest rates, payment due dates, the total sale price with all charges, and late payment charges and policies.

Equal Credit Opportunity Act

This statute prohibits discrimination against a credit applicant on the basis of sex, race, color, religion, national origin, age or marital status.

The Fair Credit Billing Act

This statute lists your responsibilities if a customer claims that your bill or invoice is mistaken.

Fair Debt Collection laws

Many states have laws regulating collection practices that they deem harassing or unfair, including writing or calling the debtor so often as to be harassing, threatening criminal action against the debtor, using obscene language, and calling the debtor at unreasonable hours.

Dealing with debtors can be tricky because of the many laws that protect them. Make sure that you have checked out your state laws before you wade into the waters.[1]


[1] Richard D. Harroch, Small Business Kit for Dummies, (Wiley 2nd Edition)(2004).

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