Why Recovering Invoices Needs to Be Part of Your Business Plan

The U.S. Small Business Administration (SBA) states that 20 percent of new businesses fail in their first year.

Fifty percent make it to year five and only 35 percent make it to the tenth anniversary. To help become one of the 35 percent celebrating ten years and more in business, learn how to avoid bad debt, collect on late invoices and why recovering invoices needs to be part of your business plan.

Widely cited statistics from the U.S. Small Business Administration (SBA) state that 20 percent of new businesses fail in their first year. Fifty percent make it to year five and only 35 percent make it to the tenth anniversary.

Although every new business owner believes they’ll be one of the 35 percent, that’s obviously not true.

According to some estimates, U.S. businesses are owed $825 billion in unpaid invoices, or $84,000, on average.

Even if you aren’t owed $84,000, you probably have some outstanding invoices that are hurting your cash flow. If you want to be one of the 35 percent then avoiding bad debt and learning how to collect on late invoices should be part of your business plan.

Avoid Unpaid Invoices with Research

Avoiding a problem is almost always better than solving one. I had a client with a five-year-old company. Thanks to a new client of theirs, they had onboarded two new employees over six months. This new client though was now several months behind on payments.

As I looked through the information, my heart sank. The address for the business was a P.O. Box. When I tried the URL for the website, I received an error message. The phone number went to a full mailbox.

My client had been the victim of fraud, and I could not help them collect. If they had checked any of those things before starting work, they would never have agreed to work with the client. Within a year, my client was out of business.

Receiving and checking basic information from a client will help prevent you from obvious fraud.

But even better is having a potential client fill out a credit application. A useful credit application will ask for extensive contact information as well as include clauses that protect you in case your client stops paying their bills.

Credit reports are usually inexpensive to run and can save you a lot of headaches down the road.

A lot of new businesses like to work with other newer companies. That’s fine, but you need to have a good understanding of your client’s financial standing. I almost always recommend that clients ask for a deposit prior to starting work.

Depending on what you know about your new client you may wish to ask for a larger deposit or structure their payments differently.

Keep Good Records

Many new business owners want to save every possible penny for marketing or development.

It’s also a good idea to invest in a good invoicing system. I have handled several claims where the company owing money explained that they had the money set aside to pay the vendor, but when they never received an invoice, they used the money for something else.

You can’t expect people to pay their bills if they never receive a bill.

You should send all invoices in a timely manner, and make sure any terms on the invoice match the terms in your credit application or contract.

When clients are even a day late in paying the invoice, it’s a good idea to follow up with a polite email. When a client is one or two weeks late in paying a bill, it may warrant a phone call. A phone call is often the best way to find out what’s truly happening with a payment.

It’s possible that your main contact at a company will not tell you why an invoice hasn’t been paid. That’s where collecting additional contact information for owners and executives on your credit application comes in handy.

In addition to invoicing on time, it’s important you keep careful records of any contracts or other agreements. If an invoice is sent to collections, the more documentation you have about the debt, the easier it will be for an agency to collect.

I generally try to avoid taking cases to court but knowing that a client has the necessary paperwork to support a potential case makes my bargaining position much stronger.

Act Fast

Once an invoice is 90 days overdue, you have a much smaller chance of collecting on it. Newer and smaller businesses rarely have someone on staff with the training necessary to handle difficult collection issues.

Do you want to spend your time chasing invoices or getting new clients and improving your product? If it’s later, it’s time to send that bill to collections. A reputable collection agency will only charge you if they collect on the invoice.

The percentage that the collection agency keeps will be less expensive than if you were never collected on the invoice.

Just as you conduct research on potential clients, you should also research your collection agency. A collection agent will represent you so make sure you work with someone who understands your business and respects your clients.

It’s important to check with the Better Business Bureau and other review sites to make sure that there are not any complaints about the agency you are considering. We also recommend that you review their website and make sure you understand their collection philosophy.

There are different collection styles and you want to work with someone with whom you’re comfortable.

I recommend finding an agency you trust before you need them. A collection agency can help you create credit applications and contracts that will protect you in the event that you need to pursue an unpaid invoice.

Knowing ahead of time will also allow you to move quickly when the problem inevitably arises. Industry statistics show that the likelihood of collecting declines significantly each month an invoice becomes further past due.

By nature, entrepreneurs are optimistic. It wouldn’t make a lot of sense to start a business if you didn’t feel you could succeed. But being optimistic and realistic are not opposites.

For your business to succeed, you need to plan for the downsides of owning a business. That includes unpaid invoices.

By Dean Kaplan, CEO, and President, of The Kaplan Group

Dean Kaplan is president of The Kaplan Group, a commercial collection agency specializing in large claims and international transactions. He has 35 years of manufacturing, international business leadership, and customer service experience.

Today, he provides business planning, training, and consultation to a variety of global companies.