Tina Dettman-Bielefeldt column: Moving on from debt collection

8:03 PM, May 22, 2013  |  Comments
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In the past few weeks, this column addressed a common problem faced by small businesses - debt collection. Remedies were discussed including small claims court, circuit court and collection agencies.

For some businesses, such as contractors and real estate agents, liens can be filed. There is also the option of selling accounts receivable to a third party, called a factor. The factor buys invoices at a discount, and then attempts to collect the full payment from your customer.

However, at the end of the day, there are still bills that won't be paid. After reasonable efforts have been made to collect, the best advice may be to learn from the loss and move on. Mary Guldan-Lindstrom, a Green Bay SCORE volunteer and owner of FOCUS CPAs, says there is a point when the debt should be written off.

"Most small businesses report their income for tax purposes on a cash basis," Guldan-Lindstrom said. "Thus, they never report the income as taxable so they can't deduct the bad debt as a tax deduction. However, they do get to deduct the cost to provide the services or products. Businesses that report on the accrual basis for taxes can deduct the bad debt."

In making the decision to stop spending time chasing a bad debt, she recommends considering the value of time.

"You already have your cost invested and now you've lost profit," she said. "Plus, you're spending time to collect and that takes away from other sales where you can be generating income."

Since businesses need cash flow to survive, Guldan-Lindstrom said, procedures should be in place before extending credit.

"I look at history and character," she said. "I will check court records to see if they've had arguments about paying bills in the past. Just because they need your service or product doesn't mean they have the ability to pay you. It's better to find out on the front end."

Newer businesses can be especially vulnerable because it's exciting to get those first orders. She says that these deals might be those that were passed up by established companies because of low margins and slow payment schedules. These are conditions that can mean the end of a start-up.

"Know what you're going to do at 30 days, 45 days, and 60 days and beyond," Guldan-Lindstrom said. "Have a game plan for clients that get behind and how far you'll push the boundaries. Then, make it clear to your customers, because being lenient trains them that they can get away with it."

She also cautions against being too sympathetic, because doing business based on the heart can get you in trouble. "You're taking on their pain, and their pain could shut you down," she said.

Depending on the type of purchase, businesses should also consider asking for money up front, requiring automatic checking account or credit card payments, full payment on receipt, or personal guarantees. And, do what you can to avoid bad customers.

"A bad customer," she said, "will take away cash in addition to time and energy that could be spent on good customers."

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