As a small-business owner, you take on many roles. You have staff, customers, and products to worry about, and debt payments can easily get lost in the shuffle. You might owe money to vendors, service providers, landlords, and lenders. For example, say you take out a loan for a new espresso machine at your café but sales drop and you can’t make the payments. Or you get caught up in ordering extra inventory for your boutique, and sales don’t go as well as you hoped. Now you can’t pay your vendor. Or you break the lease on your space three months early, and that’s a contract violation. These situations are usually fixable. If a creditor thinks that you’re too far behind, it can send you to a debt collector, whose only job is getting payment out of you. There are good and bad ways to handle this situation, and not dealing with it at all is by far the worst option.
If you’ve missed a payment, here’s what can happen. Within the first 30 days the creditor will send reminders and may charge late fees. After 30 days, your account is marked as delinquent. The creditor will contact you more often, and will start warning you about a collections agency. After you’ve been delinquent a long time (like 6 months), the creditor will charge it off, classifying it as a loss. A charge-off is an accounting procedure and does not stop the collection of the debt. A third-party debt collector will start contacting you. If you haven’t paid it by then, the company may sue.
If a Collection Agency Calls
Just ignoring calls and letters will not get the collector to go away. Worse, it may lead to the collector suing you. If a collection agency calls, don’t panic. There’s usually a reason they’re calling, and that’s a good thing; it means there is a resolution to this problem. So listen and respond in a calm, professional manner, even if the collector is being aggressive. Get their name, agency and name of the vendor or lender. Find out the amount owed. Tell the collector you will review the situation and call back at a specific date and time. This allows you to verify the debt and talk to your accountant or attorney. Once you know how much you owe and have a plan to resolve it, you are in control of the situation again.
Before you agree to pay, check things out: the most likely scenario is that the amount they’re quoting is accurate. But it’s also possible it’s wrong — you may have already paid it off, or you may have a payment plan with the creditor that the debt collector hasn’t heard about. Or you might be looking at a “zombie” debt, one that’s already been discharged or is not legally collectible and you shouldn’t have to pay. The debt might be the result of identity theft or an account hacked by a criminal. And if you’re at all skeptical, ask for a written notice or other proof of the creditor’s name and how much they say you owe. If it’s a zombie debt, identity theft, you’re not sure, or the collector sounds threatening, call an attorney.
When you negotiate with a debt collector, don’t volunteer too much information. If it is zombie debt, you might risk accidentally reactivating it or paying it back. Stick to the basics: what debt, who the creditor is, how much you owe, and the collector’s information. Never talk about your business or its revenues. Take your time. Make sure the debt is real, review your budget, and develop a payment plan. Otherwise, you could end up risking your assets or signing up for payments you won’t be able to stick to.
Business debt is different from consumer debt, and the Fair Debt Collection Practices Act (FDCPA) protects mostly the latter. Some protections still apply to business debt via court decisions, state laws, and commercial law, and each state has its own business debt collection laws, so research yours. The Uniform Commercial Code (UCC) governs commercial transactions; creditors can file a UCC-1 to take rights to collateral. The Commercial Collection Agencies of America has members who follow ethical standards; not all agencies are members, but these standards set expectations.
A Payment Plan
If the debt you’re dealing with is legitimate, paying it off in full is the best scenario — it lets you get it behind you quickly. But if you can’t, then maybe a payment plan. Any payment is a win for your creditor and collection agency, so you actually have some negotiating power. Many will agree to a reasonable plan. But be sure to work through your budget first and propose a plan yourself, or the collector will come back with payments that make your situation worse. And be sure to get the plan in writing so you can guard against some predatory practices.
Don’t make any payment before you have a written agreement. It’s possible the collector will request an initial “goodwill payment” over the phone, before mailing the paperwork. Your written agreement should state that the debt will be considered paid in full when the agreed payments are made, and that no more fees, penalties, and interest will be added. If they refuse to put the agreement in writing first, contact your attorney. Once you have a written agreement, you should make every payment as agreed. Automate the payments in your bookkeeping software.
Harassment, threats, and false or misleading statements in collection attempts are generally prohibited. If you’re in business, your protections may vary depending on state and local law. However, in most states, debt collectors cannot disclose information about your debt to any third party without your permission. If a collector has acted unfairly toward you, you should consult with an attorney. You can also contact your state or local Department of Commerce or a similar business agency, or file a complaint with the Federal Trade Commission.
Can’t Afford a Payment Plan
What if you can’t afford a payment plan? There are some options. One is a debt consolidation loan, which allows you to roll all your outstanding debts into a single loan. In addition to having just one monthly payment to make, and consequently being called less often by debt collectors, you may save on interest rates as well (though you don’t always). The downside is that you still owe the debt, and it may take longer to pay it off – though the overall payment may be lower. There are also debt settlement and restructuring, as well as bankruptcy – all of which have serious implications for your business. It’s a good idea to consult your accountant and an attorney before deciding what to do.
The process of collections may be a stressful part of your life, but it’s usually a short-term stressor. Try to stay calm, because allowing stress to guide your decisions will only end in more problems. Once you resolve your collection issues, you’ll need to get your finances back on track. From there, keep debts paid as agreed, including those on payment plans. Don’t incur more debt than your business can afford. Keep accurate, up-to-date books so you always know what you’ve paid and what you owe. Use business accounting software for your payables and receivables. Regularly monitor business finances every day or week. And build a cash reserve.
